Two Accrual Anomalies: A Dichotomy of Accrual-Return Relations

46 Pages Posted: 16 Feb 2009 Last revised: 26 Mar 2010

See all articles by Qiang Kang

Qiang Kang

Florida International University (FIU) - Department of Finance

Qiao Liu

The University of Hong Kong - School of Economics and Finance; Peking University - Guanghua School of Management

Rong Qi

ING Aeltus Asset Management

Date Written: February 15, 2009

Abstract

Motivated by the findings that the aggregate (discretionary) accruals positively predicts one-year-ahead firm-level stock returns and that there is a considerable amount of co-movement in firm-level (discretionary) accruals, we decompose firm-level (discretionary) accruals into a market-wide component and a firm-specific component. We document robust evidence that the two orthogonal (discretionary) accrual components affect stock returns in qualitatively opposite ways - while the firm-specific component negatively predicts next-period stock returns, firms with a higher level of market-wide component have on average higher next-period stock returns. Moreover, the two accrual-return relations co-exist and the accrual anomaly due to the firm-specific component of (discretionary) accruals largely supersedes the conventional accrual anomaly documented in Sloan (1996) and Xie (2001). Furthermore, a hedge strategy explicitly exploiting the two accrual anomalies yields a significantly higher return than that of a typical accrual strategy built only on firm-level (discretionary) accruals. Our analysis shows that accounting information such as (discretionary) accruals affects the stock market through both market-wide and firm-specific channels. We briefly discuss potential economic rationales behind each of the two accrual anomalies.

Keywords: Accrual anomalies, market-wide and firm-specific components of (discretionary) accruals, asset pricing, hedge strategy

JEL Classification: G1, G3, M4

Suggested Citation

Kang, Qiang and Liu, Qiao and Qi, Rong, Two Accrual Anomalies: A Dichotomy of Accrual-Return Relations (February 15, 2009). Available at SSRN: https://ssrn.com/abstract=1343895 or http://dx.doi.org/10.2139/ssrn.1343895

Qiang Kang (Contact Author)

Florida International University (FIU) - Department of Finance ( email )

University Park
11200 SW 8th Street
Miami, FL 33199
United States

Qiao Liu

The University of Hong Kong - School of Economics and Finance ( email )

School of Economics and Finance
Pokfulam
Hong Kong
Hong Kong
852-2859-1059 (Phone)
852-2548-1152 (Fax)

Peking University - Guanghua School of Management ( email )

Peking University
Beijing, Beijing 100871
China

Rong Qi

ING Aeltus Asset Management ( email )

10 State House Square
Hartford, CT 06457
United States

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