Accounting Anomalies, Risk and Return

47 Pages Posted: 9 Oct 2017

See all articles by Stephen H. Penman

Stephen H. Penman

Columbia University - Columbia Business School, Accounting, Business Law & Taxation; Bocconi University

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 University - Columbia Business School, Accounting, Business Law & Taxation ( email )

665 West 130 Street
Kravis Hall
New York, NY 10027
United States
(212) 854-9151 (Phone)

Bocconi University ( email )

Via Roentgen
5th floor
Milano 20136
Italy

Julie Zhu (Contact Author)

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

220 Handan Road
Shanghai, 200433
China

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
469
Abstract Views
2,663
Rank
24,829
PlumX Metrics