Accounting Comparability and the Mispricing of Asset Growth, Accruals and Earnings
52 Pages Posted: 18 Jun 2019 Last revised: 4 Sep 2019
Date Written: June 8, 2019
We examine whether accounting comparability is associated with the mispricing of net operating asset (NOA) growth, total accruals and earnings surprises. We document evidence that risk-adjusted returns to these anomalies are statistically and economically lower for firms with high accounting comparability than for firms with low comparability. Our results are robust to research designs based on multiple models to compute risk-adjusted returns, cross-sectional regressions, alternative sample construction techniques and controls for additional firm characteristics, including economic similarity with industry peers, performance volatility, and the quality of firms’ information environment. Finally, we find that while the anomalies have attenuated for both Low and High comparability firms in the last 15 years, they continue to persist among Low comparability firms but have generally disappeared among High comparability firms. Collectively, the evidence suggests that information in NOA growth, accruals and earnings surprises is incorporated into prices in a more timely and complete manner for firms with higher accounting comparability. This is consistent with the presumption held by standard setters, regulators, and practitioners that comparability enhances the usefulness of accounting information.
Keywords: Accounting Comparability, Asset Growth Anomaly, Accrual Anomaly, Post-Earnings Announcement Drift, PEAD, Stock Price Efficiency
JEL Classification: M41
Suggested Citation: Suggested Citation