Accruals and Conditional Equity Premium

Journal of Accounting Research, Forthcoming

45 Pages Posted: 24 Jan 2010 Last revised: 19 Oct 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: January 22, 2010

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 stock 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]). Consistent with the risk-based explanation, aggregate accruals, as a proxy for conditional equity premium, forecast changes in aggregate economic activity. Moreover, we 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, Earnings, Stock Return Predictability, Market Efficiency

JEL Classification: G1

Suggested Citation

Guo, Hui and Jiang, Xiaowen, Accruals and Conditional Equity Premium (January 22, 2010). Journal of Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1540565

Hui Guo (Contact Author)

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

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

Danbury, CT
United States

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