Connecting the Dots: The Accruals Quality Premium vs. The Value Premium

Abstract

Two separate strands in the existing literature document that (1) the value premium may be the reward for risk generated by disagreement between investors with heterogeneous beliefs about future stock payoffs (Doukas et. al. 2002, 2004), and that (2) poor quality of accounting information is an important determinant of such disagreement (Lobo et. al. 2006). We investigate the connection between the accrual quality and the growth/value characteristics at firm level and whether there is any connection between the value premium and the accrual quality premium. This study provides evidence that value stocks are more likely to have high accrual quality, while growth stocks are more likely to have poor quality accruals. While the two premia are strongly connected during down markets, accrual quality does not seem to be the source that generates the higher dispersion of beliefs that value firms are documented to have. On the contrary, our results imply that value firms mitigate the quality of their information environment by providing better quality accounting information relative to growth firms.

JEL Classification: M41