Predicting Stock Market Returns with Aggregate Discretionary Accruals
Journal of Accounting Research, Forthcoming
52 Pages Posted: 9 Mar 2010
Date Written: January 8, 2010
We find that the positive relation between aggregate accruals and one-year-ahead market returns documented in Hirshleifer, Hou and Teoh  is driven by discretionary accruals but not normal accruals. The return forecasting power of aggregate discretionary accruals is robust to choices of sample periods, return measurements, estimation methods, business condition and risk premium proxies, and accrual models used to isolate discretionary accruals. Our extensive analysis shows that aggregate discretionary accruals, in sharp contrast to aggregate normal accruals, contain little information about overall business conditions or aggregate cash flows and display little co-movement with ICAPM-motivated risk premium proxies. Our findings imply that aggregate discretionary accruals likely reflect aggregate fluctuations in earnings management, thereby favoring the behavioral explanation that managers time aggregate equity markets to report earnings.
Keywords: Aggregate Discretionary Accruals, Return Predictive Regressions, ICAPM-Motivated Risk Premium Proxies, Managerial Market Timing
JEL Classification: G10, M40
Suggested Citation: Suggested Citation