Accruals, Capital Investments, and Stock Returns

Posted: 24 Sep 2008

See all articles by K.C. John Wei

K.C. John Wei

Hong Kong Polytechnic University

Feixue Xie

University of Texas at El Paso - College of Business Administration - Department of Economics and Finance

Date Written: September, 23 2008

Abstract

The evidence from this study shows that the "accruals anomaly" and the "capital investment anomaly" are distinct, even though capital investments and accruals may be related in a certain way. The results also indicate that, after adjustment for the Fama-French three risk factors, investors earn substantially higher returns by using a strategy that exploits both anomalies at the same time than by exploiting either anomaly alone. Using current accruals as the measure of accruals produced similar results to using total accruals, and the results are robust to various measures of return. The evidence suggests that managers in companies ranked highest in both accruals and capital investments may be overly optimistic about future demand for their products.

Keywords: Equity Investments, Research Sources, Financial Statement Analysis, Accounting and Financial Reporting Issues, Portfolio Management, Equity Strategies, Equity Investments, Fundamental Analysis and Valuation Models

Suggested Citation

Wei, Kuo-Chiang (John) and Xie, Feixue, Accruals, Capital Investments, and Stock Returns (September, 23 2008). Financial Analysts Journal, Vol. 64, No. 5, 2008, Available at SSRN: https://ssrn.com/abstract=1272611

Kuo-Chiang (John) Wei (Contact Author)

Hong Kong Polytechnic University ( email )

11 Yuk Choi Rd
Hung Hom
Hong Kong

Feixue Xie

University of Texas at El Paso - College of Business Administration - Department of Economics and Finance ( email )

500 W. University Ave.
El Paso, TX 79968
United States
915-747-7788 (Phone)
915-747-6268 (Fax)

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