The Q-Theory Approach to Understanding the Accrual Anomaly

Journal of Accounting Research, Forthcoming

52 Pages Posted: 31 Aug 2009

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

Date Written: August 27, 2009

Abstract

Interpreting accruals as working capital investment, we hypothesize based on q-theory that firms optimally adjust their accruals in response to discount rate changes. A higher discount rate means less profitable investments and lower accruals, and a lower discount rate means more profitable investments and higher accruals. Our evidence supports this optimal investment hypothesis: (i) adding an investment factor into standard factor regressions substantially reduces the magnitude of the accrual anomaly, often to insignificant levels; (ii) accruals covary negatively with discount rate estimates from the dividend discounting model, and for the most part, with estimates from the residual income model; (iii) accruals with low accounting reliability covary more with capital investment than accruals with high accounting reliability; and (iv) expected returns to accruals-based trading strategies are time-varying, suggesting that the deterioration of the accrual effect in recent years might be temporary and likely to mean-revert in the near future.

Keywords: The accruals anomaly, total accruals, discretionary accruals, net operating assets, investment-based asset pricing, capital investment, time-varying expected returns

JEL Classification: G12, G14, G31, G34, M41

Suggested Citation

Wu, Jin (Ginger) and Zhang, Lu and Zhang, Frank, The Q-Theory Approach to Understanding the Accrual Anomaly (August 27, 2009). Journal of Accounting Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1462994

Jin (Ginger) Wu (Contact Author)

University of Georgia - Department of Banking and Finance ( email )

Terry College of Business
Athens, GA 30602-6253
United States

Lu Zhang

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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