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