Accruals and Value/Growth Anomalies: New Evidence on Their Relation

Abstract

In this paper, we find that firms with low (high) accruals experience positive (negative) abnormal returns only when they are characterized by high (low) value/growth measures (book to market ratio and free cash flow yield). The level of accruals of those firms is found to be attributable to both growth and earnings management. Further, our evidence implies that the predictive power of accruals for future returns could be incremental to that of book to market ratio. At the same time, free cash flow yield subsumes the predictive power of both accruals and book to market ratio.

Keywords: accrual anomaly, value/growth anomaly, earnings management

JEL Classification: M4