Accruals and the Performance of Stock Returns Following External Financing Activities

The British Accounting Review, Vol. 43, pp. 214-229, 2011

Posted: 26 Aug 2008 Last revised: 6 Aug 2011

See all articles by George A. Papanastasopoulos

George A. Papanastasopoulos

University of Piraeus - Department of Business Administration

Dimitrios D. Thomakos

University of Peloponnese - School of Management, Economics and Informatics; University of Bologna - Rimini Center for Economic Analysis (RCEA)

Tao Wang

City University of New York (CUNY) - Department of Economics

Date Written: January 25, 2011

Abstract

This paper investigates the relation of the external financing anomaly with the accrual anomaly, by focusing separately on working capital accruals and long-term accruals. We find that external financing and accrual hedge portfolios not only generate superior returns, but they also constitute statistical arbitrage opportunities. Portfolio-level analysis and firm-level cross-sectional regressions show that the ability of external financing measures in predicting future returns remains strong, after controlling for working capital accruals. However, this ability is substantially reduced after controlling for long-term accruals. Our results appear to be consistent with investors’ failure to recognise opportunistic earnings management and/or agency related overinvestment.

Keywords: External financing activities, accruals, stock returns

JEL Classification: G10, M4

Suggested Citation

Papanastasopoulos, George A. and Thomakos, Dimitrios D. and Wang, Tao, Accruals and the Performance of Stock Returns Following External Financing Activities (January 25, 2011). The British Accounting Review, Vol. 43, pp. 214-229, 2011. Available at SSRN: https://ssrn.com/abstract=1253783

George A. Papanastasopoulos (Contact Author)

University of Piraeus - Department of Business Administration ( email )

80, KARAOLI & DIMITRIOU,PIRAEUS
Piraeus, 18534
Greece

Dimitrios D. Thomakos

University of Peloponnese - School of Management, Economics and Informatics ( email )

Department of Economics
22100 Tripolis
Greece
+30 2710 230139 (Fax)

HOME PAGE: http://es.uop.gr/

University of Bologna - Rimini Center for Economic Analysis (RCEA)

Via Patara, 3
Rimini (RN), RN 47900
Italy

Tao Wang

City University of New York (CUNY) - Department of Economics ( email )

65-30 Kissena Blvd
Flushing, NY 11367-1597
United States

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