Aggregate Accruals and Market Returns: The Role of Aggregate M&A Activity

53 Pages Posted: 19 Dec 2019 Last revised: 1 Oct 2020

See all articles by John C. Heater

John C. Heater

Duke University - Fuqua School of Business

Suresh Nallareddy

Duke University - Fuqua School of Business

Mohan Venkatachalam

Duke University - Fuqua School of Business

Date Written: February 11, 2020

Abstract

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

Heater, John C. and Nallareddy, Suresh and Venkatachalam, Mohan, Aggregate Accruals and Market Returns: The Role of Aggregate M&A Activity (February 11, 2020). Available at SSRN: https://ssrn.com/abstract=3497794 or http://dx.doi.org/10.2139/ssrn.3497794

John C. Heater

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-1085 (Phone)

HOME PAGE: http://www.johnheater.com

Suresh Nallareddy (Contact Author)

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States

Mohan Venkatachalam

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-7859 (Phone)
919-660-7971 (Fax)

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