The Pricing of Accrual Quality

63 Pages Posted: 5 Jul 2010 Last revised: 14 Dec 2011

See all articles by Sati P. Bandyopadhyay

Sati P. Bandyopadhyay

University of Waterloo

Tony S. Wirjanto

University of Waterloo - School of Accounting and Finance; University of Waterloo, Department of Statistics & Actuarial Science

Alan Guoming Huang

University of Waterloo

Date Written: August 30, 2011

Abstract

Contrary to the recent literature which suggests that accrual quality predicts low returns, we find a strong and long-lasting positive relation between the accrual quality measure of Dechow and Dichev (2002) (DD) and future returns. In decile portfolios that rank on DD, a hedge portfolio that goes long in the lowest decile and short in the highest decile generates an annualized, risk-adjusted return in the order of 10% from one-month to five-year horizons.The findings are robust to common risk factors and return-informative variables and to alternative accrual quality measures, are not subsumed by transaction costs and short-sale constraints, and extend to related measures of accrual volatility. The return premiums related to DD also give rise to a DD-based factor that prices a number of Fama-French portfolios. We show that the pricing of DD is consistent with the convexity valuation of uncertainty of Pastor and Veronesi (2003), in that managers fail to improve the firm's accrual quality over time and thus impose a relatively constant degree of uncertainty for investors to learn about the firm.

Keywords: Accrual quality, Stock returns, Return premium, Pricing factor, Information uncertainty

JEL Classification: G12, G14, M41

Suggested Citation

Bandyopadhyay, Sati P. and Wirjanto, Tony S. and Huang, Alan G., The Pricing of Accrual Quality (August 30, 2011). Available at SSRN: https://ssrn.com/abstract=1634722 or http://dx.doi.org/10.2139/ssrn.1634722

Sati P. Bandyopadhyay

University of Waterloo ( email )

School of Accountancy
Waterloo, Ontario N2L 3G1
Canada
519-888-4567, ext. 2533 (Phone)
519-888-7562 (Fax)

Tony S. Wirjanto

University of Waterloo - School of Accounting and Finance ( email )

200 University Avenue West
Waterloo, Ontario N2L 3G1
Canada
519-888-4567 x35210 (Phone)

HOME PAGE: http://https://uwaterloo.ca/statistics-and-actuarial-science/people-profiles/tony-wirjanto

University of Waterloo, Department of Statistics & Actuarial Science ( email )

200 University Avenue West
Waterloo, Ontario N2L 3G1
Canada
519-888-4567 x35210 (Phone)
519-746-1875 (Fax)

HOME PAGE: http://math.uwaterloo.ca/statistics-and-actuarial-science/people-profiles/tony-wirjanto

Alan G. Huang (Contact Author)

University of Waterloo ( email )

School of Accounting and Finance
Waterloo, Ontario N2L 3G1
Canada
519-888 4567 ext. 36770 (Phone)

Register to save articles to
your library

Register

Paper statistics

Downloads
529
Abstract Views
2,161
rank
30,967
PlumX Metrics