Accruals and Conditional Equity Premium*

56 Pages Posted: 13 Sep 2008 Last revised: 26 Jan 2010

See all articles by Hui Guo

Hui Guo

University of Cincinnati - Department of Finance - Real Estate

Xiaowen Jiang

Western Connecticut State University - Ancell School of Business

Date Written: November 1, 2008

Abstract

Accruals correlate closely with the determinants of conditional equity premium at both the firm and the aggregate levels. The common component of firm-level accruals, which cannot be diversified away by aggregation, explains the positive relation between aggregate accruals and future market returns (Hirshleifer, Hou, and Teoh, 2007). The residual component, which accounts for most variation in firm-level accruals, is responsible for the negative cross-sectional relation between firm-level accruals and future stock returns (Sloan, 1996). We also document a similar co-movement of earnings with conditional equity premium at both the firm and the aggregate levels, which helps explain the negative relation between changes in aggregate earnings and contemporaneous market returns (Kothari, Lewellen, and Warner, 2006).

Keywords: Accruals, Conditional equity premium, Asset pricing

JEL Classification: G12, G14, M41, M43

Suggested Citation

Guo, Hui and Jiang, Xiaowen, Accruals and Conditional Equity Premium* (November 1, 2008). AAA 2009 Financial Accounting and Reporting Section (FARS) Paper, Available at SSRN: https://ssrn.com/abstract=1267313 or http://dx.doi.org/10.2139/ssrn.1267313

Hui Guo

University of Cincinnati - Department of Finance - Real Estate ( email )

College of Business
418 Carl H. Lindner Hall
Cincinnati, OH 45221
United States
513.556.7077 (Phone)
513.556.0979 (Fax)

HOME PAGE: http://homepages.uc.edu/~guohu/

Xiaowen Jiang (Contact Author)

Western Connecticut State University - Ancell School of Business ( email )

Danbury, CT
United States

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