Understanding the Accrual Anomaly

49 Pages Posted: 24 Oct 2007 Last revised: 19 Feb 2008

See all articles by Jin (Ginger) Wu

Jin (Ginger) Wu

University of Georgia - Department of Banking and Finance

Lu Zhang, 张橹

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: October 2007

Abstract

Interpreting accruals as working capital investment, we hypothesize that firms rationally adjust their investment to respond to discount rate changes. Consistent with the optimal investment hypothesis, we document that (i) the predictive power of accruals for future stock returns increases with the covariations of accruals with past and current stock returns, and (ii) adding investment- based factors into standard factor regressions substantially reduces the magnitude of the accrual anomaly. High accrual firms also have similar corporate governance and entrenchment indexes as low accrual firms. This evidence suggests that the accrual anomaly is more likely to be driven by optimal investment than by investor overreaction to excessive growth or over-investment.

Suggested Citation

Wu, Jin (Ginger) and Zhang, Lu and Zhang, Frank, Understanding the Accrual Anomaly (October 2007). NBER Working Paper No. w13525. Available at SSRN: https://ssrn.com/abstract=1024129

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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