Accruals and Future Stock Returns: Tests of the Naive Investor Hypothesis

30 Pages Posted: 22 Aug 1999

See all articles by Ashiq Ali

Ashiq Ali

University of Texas at Dallas - Naveen Jindal School of Management

Lee-Seok Hwang

Seoul National University - College of Business Administration

Mark A. Trombley

University of Arizona - Eller College of Management

Multiple version iconThere are 2 versions of this paper

Date Written: June 1999

Abstract

We explore whether the association between accruals and future returns documented by Sloan (1996) is due to fixation by naive investors on the total amount of reported earnings without regard for the relative magnitude of the accrual and cash flow components. Contrary to the predictions of the naive investor hypothesis, we find that the predictive ability of accruals for subsequent annual returns and for quarterly earnings-announcement stock returns is not lower for large firms or for firms followed more by analysts or held more by institutions. Further, we find that the ability of accruals to predict future returns does not seem to depend on stock price or transaction volume, measures of transaction costs, also contrary to predictions of the naive investor hypothesis. These results are robust to regression and hedge portfolio tests. We conclude that the predictive ability of accruals for subsequent returns does not seem to be due to the inability of market participants to understand value-relevant information.

JEL Classification: D82, G14, M41

Suggested Citation

Ali, Ashiq and Hwang, Lee-Seok and Trombley, Mark A., Accruals and Future Stock Returns: Tests of the Naive Investor Hypothesis (June 1999). Available at SSRN: https://ssrn.com/abstract=169490 or http://dx.doi.org/10.2139/ssrn.169490

Ashiq Ali

University of Texas at Dallas - Naveen Jindal School of Management ( email )

800 West Campbell Road, SM41
Richardson, TX 75080-3021
United States
972-883-6360 (Phone)
972-883-6811 (Fax)

HOME PAGE: http://www.utdallas.edu/~axa042200/

Lee-Seok Hwang

Seoul National University - College of Business Administration ( email )

Seoul, 151-742
Korea, Republic of (South Korea)

Mark A. Trombley (Contact Author)

University of Arizona - Eller College of Management ( email )

McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States
520-621-4805 (Phone)
520-621-3742 (Fax)

Register to save articles to
your library

Register

Paper statistics

Downloads
1,737
Abstract Views
7,283
rank
9,363
PlumX Metrics