The Return Premiums to Accruals Quality

31 Pages Posted: 24 Oct 2015 Last revised: 25 Oct 2015

See all articles by Sati P. Bandyopadhyay

Sati P. Bandyopadhyay

University of Waterloo

Alan Guoming Huang

University of Waterloo

Kevin Jialin Sun

St. John's University

Tony S. Wirjanto

University of Waterloo - School of Accounting and Finance; University of Waterloo, Department of Statistics & Actuarial Science

Date Written: October 22, 2015

Abstract

Using a battery of look-ahead-bias free measures of accruals quality (AQ), we find a strong and long lasting negative relation between future returns and AQ. In decile portfolios that rank on AQ, a hedge portfolio that goes long in the lowest decile and short in the highest decile generates an annualized, risk-adjusted return of 4-12% over one-month to five-year horizons, depending on the AQ measure and the portfolio weighting scheme. The return premiums associated with AQ are, i) robust to a wide range of AQ measures, ii) robust to a battery of return informative variables, and iii) not driven by low-priced or small stocks, earnings shocks, or the fourth-quarter effect. The documented premiums are consistent with the information uncertainty effect where firm uncertainty is negatively related to future returns.

Keywords: Accruals quality, Stock returns, Return premium, Information uncertainty

Suggested Citation

Bandyopadhyay, Sati P. and Huang, Alan G. and Sun, Kevin Jialin and Wirjanto, Tony S., The Return Premiums to Accruals Quality (October 22, 2015). Review of Quantitative Finance and Accounting, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2678014

Sati P. Bandyopadhyay

University of Waterloo ( email )

School of Accountancy
Waterloo, Ontario N2L 3G1
Canada
519-888-4567, ext. 2533 (Phone)
519-888-7562 (Fax)

Alan G. Huang

University of Waterloo ( email )

School of Accounting and Finance
Waterloo, Ontario N2L 3G1
Canada
519-888 4567 ext. 36770 (Phone)

Kevin Jialin Sun (Contact Author)

St. John's University ( email )

8000 Utopia Parkway
Queens, NY 11439
United States

Tony S. Wirjanto

University of Waterloo - School of Accounting and Finance ( email )

200 University Avenue West
Waterloo, Ontario N2L 3G1
Canada
519-888-4567 x35210 (Phone)

HOME PAGE: http://https://uwaterloo.ca/statistics-and-actuarial-science/people-profiles/tony-wirjanto

University of Waterloo, Department of Statistics & Actuarial Science ( email )

200 University Avenue West
Waterloo, Ontario N2L 3G1
Canada
519-888-4567 x35210 (Phone)
519-746-1875 (Fax)

HOME PAGE: http://math.uwaterloo.ca/statistics-and-actuarial-science/people-profiles/tony-wirjanto

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