Accruals and Future Performance: Can It be Attributed to Risk?
58 Pages Posted: 15 Dec 2012 Last revised: 30 Jan 2015
Date Written: December 19, 2014
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: Suggested Citation