The Return Premiums to Accruals Quality

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