Connections between the Market Pricing of Accruals Quality and Accounting-based Anomalies

49 Pages Posted: 13 Apr 2017 Last revised: 22 Dec 2019

See all articles by Kai Du

Kai Du

Pennsylvania State University

Daniel Jiang

University of Waterloo - School of Accounting and Finance

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Date Written: July 10, 2018

Abstract

We examine whether prior findings on the market pricing of accruals quality (AQ) can be attributed to other forms of accounting-based anomalies. Using hedge portfolio analysis and cross-sectional regressions, we find that the return predictive power of AQ overlaps with several other accounting signals. We also find that, similar to other accounting-based anomalies, especially the accruals anomaly, the AQ pricing effect (i) is likely due to mispricing instead of risk pricing; (ii) is attenuated in recent years; and (iii) disappears among firms with cash flow forecasts or long-term growth forecasts. Our findings highlight the importance of controlling for existing return predictive signals when evaluating the market pricing of AQ.

Keywords: Accruals Quality, Accruals Anomaly, Market Pricing, Mispricing

Suggested Citation

Du, Kai and Jiang, Xin, Connections between the Market Pricing of Accruals Quality and Accounting-based Anomalies (July 10, 2018). Available at SSRN: https://ssrn.com/abstract=2949039 or http://dx.doi.org/10.2139/ssrn.2949039

Kai Du (Contact Author)

Pennsylvania State University ( email )

University Park, PA 16802
United States

Xin Jiang

University of Waterloo - School of Accounting and Finance ( email )

200 University Avenue West
Waterloo, Ontario N2L 3G1 N2L 3G1
Canada

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