Accounting Anomalies, Risk and Return

47 Pages Posted: 29 Sep 2011 Last revised: 15 Mar 2012

Stephen H. Penman

Columbia Business School - Department of Accounting

Julie Lei Zhu

Boston University - School of Management

Date Written: August 1, 2011

Abstract

Abstract. This paper investigates the question of whether so-called anomalous returns predicted by accounting numbers are normal returns for risk or abnormal returns. It does so via a model that shows how accounting numbers inform about normal returns if pricing were rational. The model equates expected returns to expectations of earnings and earnings growth, so that any variable that forecasts earnings and earnings growth also forecasts required returns if the market prices those outcomes as risky. The empirical results indicate that many accounting anomaly variables forecast forward earnings and growth, and in the same direction in which they forecast returns. These variables include accruals, asset growth, profitability, investment, net share issuance, and external financing. In short, the observed “anomalous” returns associated with these accounting numbers are consistent with the rational pricing.

Suggested Citation

Penman, Stephen H. and Zhu, Julie Lei, Accounting Anomalies, Risk and Return (August 1, 2011). Available at SSRN: https://ssrn.com/abstract=1934365 or http://dx.doi.org/10.2139/ssrn.1934365

Stephen H. Penman (Contact Author)

Columbia Business School - Department of Accounting ( email )

3022 Broadway
New York, NY 10027
United States
212-854-9151 (Phone)
212-316-9219 (Fax)

Lei Zhu

Boston University - School of Management ( email )

595 commonwealth avenue
Boston, 02215
United States

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