Connections between the Market Pricing of Accruals Quality and Accounting-based Anomalies
49 Pages Posted: 13 Apr 2017 Last revised: 22 Dec 2019
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Connections between the Market Pricing of Accruals Quality and Accounting-based Anomalies
Connections between the Market Pricing of Accruals Quality and Accounting-based Anomalies
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
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