Cross-Firm Return Predictability and Accounting Quality

47 Pages Posted: 28 Sep 2015 Last revised: 3 Feb 2016

See all articles by Wen Chen

Wen Chen

City University of Hong Kong (CityUHK)

Mozaffar Khan

Causeway Capital Management, LLC

Leonid Kogan

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

George Serafeim

Harvard University - Harvard Business School

Date Written: January 31, 2016

Abstract

We examine whether cross-firm return predictability is associated with accounting quality (AQ), and find that stock returns of good AQ firms significantly positively predict one-month-ahead stock returns to industry- and size- matched poor AQ firms. In testing a delayed-information-processing mechanism behind the cross-firm return predictability, we find that: (i) Analyst earnings forecast revisions (FR) mimic the return patterns, as FR of good AQ firms significantly positively predict one-month-ahead FR of matched poor AQ firms; (ii) Cross-firm return predictability is concentrated in months with substantial news arrival, but not in no-news months; (iii) Cross-firm return predictability is stronger when the good AQ predictor firms have a richer information environment than poor AQ firms as proxied by analyst following and institutional ownership. Collectively the results uncover a new relation between accounting quality and stock return dynamics.

Keywords: Return predictability, Accounting quality, Information frictions

JEL Classification: G12, M41

Suggested Citation

Chen, Wen and Khan, Mozaffar and Kogan, Leonid and Serafeim, George, Cross-Firm Return Predictability and Accounting Quality (January 31, 2016). Available at SSRN: https://ssrn.com/abstract=2666247 or http://dx.doi.org/10.2139/ssrn.2666247

Wen Chen

City University of Hong Kong (CityUHK) ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

Mozaffar Khan (Contact Author)

Causeway Capital Management, LLC

Leonid Kogan

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-636
Cambridge, MA 02142
United States
617-253-2289 (Phone)
617-258-6855 (Fax)

HOME PAGE: http://web.mit.edu/lkogan2/www/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

George Serafeim

Harvard University - Harvard Business School ( email )

381 Morgan Hall
Boston, MA 02163
United States

HOME PAGE: http://goo.gl/q4cJ5A

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