Aggregate Accruals and Market Returns: The Role of Aggregate M&A Activity
54 Pages Posted: 19 Dec 2019 Last revised: 23 Jul 2021
Date Written: July 22, 2021
Extant literature documents that aggregate accruals positively predict future market returns and attributes this relation to either changes in discount rates or systematic earnings management. We offer an alternative explanation: aggregate merger and acquisition (M&A) activity drives this relation. M&A activity affects the magnitude of accruals, which in turn drives the market return predictability of aggregate accruals. We find that the ability of both aggregate accruals and discretionary aggregate accruals (a measure of systematic earnings management) to predict market returns disappears after controlling for aggregate M&A activity. Furthermore, aggregate M&A activity predicts future market returns, consistent with a price response to improvements in macroeconomic outcomes due to aggregate M&A activity.
Keywords: Aggregate Accruals, Market Returns, M&A activity, Economic Efficiency, Macroeconomic Outcomes, Systematic earnings Management
JEL Classification: G00, G1, G3, E03, E2, E32, M41, O4
Suggested Citation: Suggested Citation