Accrual Anomaly and Idiosyncratic Risk in Emerging Capital Market

Abstract

This paper investigates specific risk in emerging market. Emerging markets are accumulating capital at a faster rate than developed markets but they lag far behind developed markets. Risk is one of the main factors that investors consider when making investments.

Risk contained in Financial Accounting come from accrual accounting method. Accrual measurements in the Balance Sheet are measured using persistence current operating accrual, persistence non-current operating accrual, persistence financial accrual and accrual anomaly. Accruals in income statement are measured using the accrual anomaly modified jones model. Accrual measurements are used as information used by investors in predicting risk specific. The idiosyncratic risk reflects the specific information about the company and it will fluctuate according to the information itself.

To measure the risk in this study five factors of Fama-French were used. Using the SEM AMOS Ver.24 and Sobel Test Path Analysis, we find that the financial risk documented in this study is associated to risk faced by investor. Prospect Theory can be used to predict and explain behaviour decision making to overcome disaster risk faced by investor in the future.

Keywords: Financial Risk, Accrual, Prospect Theory