Understanding the Accrual Anomaly

49 Pages Posted: 25 Mar 2008 Last revised: 16 Sep 2009

See all articles by Jin (Ginger) Wu

Jin (Ginger) Wu

University of Georgia - Department of Banking and Finance

Lu Zhang

Ohio State University - Fisher College of Business; National Bureau of Economic Research (NBER)

Frank Zhang

Yale School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: April 2008


Interpreting accruals as working capital investment, we hypothesize that firms rationally adjust their capital investment to respond to discount rate changes. Consistent with the discount-rate hypothesis, we document that (i) the predictive power of accruals for future returns increases with the correlations of accruals with past and current stock returns;(ii) controlling for investment substantially reduces the magnitude of the accrual anomaly; (iii) the ex-ante expected returns of various accrual strategies have been stable at around 5% per annum over the past 35 years; (iv) the accounting reliability of various accrual components is inversely related to their cross-correlations with investment-to-assets; and finally (v) high accrual firms have similar corporate governance and entrenchment indexes as low accrual firms, suggesting that the accrual anomaly is unlikely to be driven by investor overreaction to over-investment.

Keywords: The accruals anomaly, total accruals, discretionary accruals, net operating assets, investment-based asset pricing, capital investment, time-varying expected returns

JEL Classification: G12, G14, G31, G34, M41

Suggested Citation

Wu, Jin (Ginger) and Zhang, Lu and Zhang, Frank, Understanding the Accrual Anomaly (April 2008). Ross School of Business Paper No. 1100. Available at SSRN: https://ssrn.com/abstract=1020670 or http://dx.doi.org/10.2139/ssrn.1020670

Jin (Ginger) Wu

University of Georgia - Department of Banking and Finance ( email )

Terry College of Business
Athens, GA 30602-6253
United States

Lu Zhang (Contact Author)

Ohio State University - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States
585-267-6250 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Frank Zhang

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

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