Accounting Anomalies, Risk and Return

47 Pages Posted: 9 Oct 2017

See all articles by Stephen H. Penman

Stephen H. Penman

Columbia Business School - Department of Accounting

Julie Zhu

Fanhai International School of Finance(FISF), Fudan University

Multiple version iconThere are 2 versions of this paper

Date Written: September 2014

Abstract

This paper investigates the question of whether so-called anomalous returns predicted by accounting numbers are normal returns for risk or abnormal returns. It does so via a model that shows how accounting numbers inform about normal returns if pricing were rational. The model equates expected returns to expectations of earnings and earnings growth, so that any variable that forecasts earnings and earnings growth also forecasts required returns if the market prices those outcomes as risky. The empirical results indicate that many accounting anomaly variables forecast forward earnings and growth, and in the same direction in which they forecast returns. These variables include accruals, asset growth, profitability, investment, net share issuance, and external financing. In short, the observed “anomalous” returns associated with these accounting numbers are consistent with the rational pricing.

Suggested Citation

Penman, Stephen H. and Zhu, Julie, Accounting Anomalies, Risk and Return (September 2014). The Accounting Review, Vol. 89, No. 5, 2014. Available at SSRN: https://ssrn.com/abstract=3049235

Stephen H. Penman

Columbia Business School - Department of Accounting ( email )

3022 Broadway
New York, NY 10027
United States
212-854-9151 (Phone)
212-316-9219 (Fax)

Julie Zhu (Contact Author)

Fanhai International School of Finance(FISF), Fudan University ( email )

220 Handan Road
Shanghai, 200433
China

Register to save articles to
your library

Register

Paper statistics

Downloads
106
rank
17,297
Abstract Views
715
PlumX Metrics