Aggregate Accruals and Market Returns: The Role of Aggregate M&A Activity
40 Pages Posted:
Date Written: December 3, 2019
Extant literature documents that aggregate accruals positively predict future market returns and attributes this relation to either change 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 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. Finally, aggregate M&A activity predicts future market returns, driven in part by improvements in macroeconomic outcomes.
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