Accruals and Momentum

45 Pages Posted: 15 Mar 2011 Last revised: 2 Mar 2015

See all articles by Ming Gu

Ming Gu

Xiamen University - School of Economics

Yangru Wu

Rutgers University, Newark - School of Business - Department of Finance & Economics

Date Written: July 14, 2014

Abstract

We establish a robust link between momentum and accruals. Momentum profitability is mostly concentrated in firms with high accruals. Cross-sectional characteristics of momentum previously documented do not subsume the effect of accruals on momentum. Loser stocks with high accruals experience significant decreases in industry-adjusted sales growth and the largest amount of income-decreasing special items in subsequent years. Most of momentum profit among high-accrual firms is attributable to the high discretionary accrual group. Our findings indicate that due to the joint force of earnings overestimation and earnings manipulation, the downward payoff of loser stocks with high accruals largely drives the accrual-based momentum profit.

Keywords: momentum, accruals, earnings overestimation, earnings manipulation

JEL Classification: G1, M4

Suggested Citation

Gu, Ming and Wu, Yangru, Accruals and Momentum (July 14, 2014). AFA 2012 Chicago Meetings Paper, Available at SSRN: https://ssrn.com/abstract=1785554 or http://dx.doi.org/10.2139/ssrn.1785554

Ming Gu (Contact Author)

Xiamen University - School of Economics ( email )

Xiamen, Fujian
China

Yangru Wu

Rutgers University, Newark - School of Business - Department of Finance & Economics ( email )

1 Washington Park
Newark, NJ 07102
United States
973-353-1146 (Phone)
973-353-1006 (Fax)

HOME PAGE: http://andromeda.rutgers.edu/~yangruwu

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