Accruals and Future Performance: Can It be Attributed to Risk?

58 Pages Posted: 15 Dec 2012 Last revised: 30 Jan 2015

See all articles by Francesco Momentè

Francesco Momentè

Bocconi University - Department of Accounting

Francesco Reggiani

University of Zurich

Scott A. Richardson

AQR Capital Management, LLC; London Business School

Date Written: December 19, 2014

Abstract

We decompose broad based measures of accruals into firm specific and related firm components. We find that the negative relation between accruals and future firm performance is almost entirely attributable to the firm specific component. Standard risk based explanations are hard to reconcile with this fact. To the extent expected returns have a common component spanning related firms, a risk based explanation would suggest a stronger negative relation between accruals and future firm performance when related firms are also growing. Instead, the attenuation we document is more likely attributable to sub-optimal investment decisions, which the stock market and analysts do not incorporate in a timely manner.

Keywords: investment activity, accruals, profitability, stock returns, supply chain

JEL Classification: G12, G14, M41

Suggested Citation

Momentè, Francesco and Reggiani, Francesco and Richardson, Scott Anthony, Accruals and Future Performance: Can It be Attributed to Risk? (December 19, 2014). Review of Accounting Studies, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2189573 or http://dx.doi.org/10.2139/ssrn.2189573

Francesco Momentè

Bocconi University - Department of Accounting ( email )

Via Roentgen 1
Milan, 20136
Italy

Francesco Reggiani

University of Zurich ( email )

Rämistrasse 71
Zürich, CH-8006
Switzerland

Scott Anthony Richardson (Contact Author)

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

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