Accounting Anomalies and Information Uncertainty

57 Pages Posted: 29 Jun 2003

See all articles by Jennifer Francis

Jennifer Francis

Duke University

Ryan LaFond

Algert Global, LLC

Per Olsson

Duke University

Katherine Schipper

Duke University - Fuqua School of Business

Date Written: February 2003

Abstract

We examine whether rational investor responses to information uncertainty explain properties of and returns to accounting-based trading anomalies. We proxy for information uncertainty with two measures of earnings quality: the standard deviation of the residuals from a Dechow and Dichev [2002] model relating accruals to cash flows, and the absolute value of performance-adjusted abnormal accruals from a modified Jones [1991] model. Over 1982-2001, we find that accounting-based trading anomalies (post-earnings announcement drift, value-glamour, and accruals strategies) are correlated with earnings quality. Specifically, extreme anomaly portfolios have poorer earnings quality than non-extreme portfolios, and within the extreme anomaly portfolios, poor earnings quality securities are more prevalent and earn larger abnormal returns than good earnings quality securities. Consistent with greater resolution of uncertainty for poor earnings quality securities, the abnormal returns to poor quality securities converge to the abnormal returns to good quality securities as the post-portfolio formation period lengthens. Taken as a whole, these results indicate that information uncertainty plays an important role in explaining accounting anomalies.

Keywords: anomalies, information uncertainty, earnings quality

JEL Classification: G14, M41, M43, D82

Suggested Citation

Francis, Jennifer and LaFond, Ryan and Olsson, Per Mikael and Schipper, Katherine, Accounting Anomalies and Information Uncertainty (February 2003). AFA 2004 San Diego Meetings; EFA 2003 Annual Conference Paper No. 199. Available at SSRN: https://ssrn.com/abstract=414141 or http://dx.doi.org/10.2139/ssrn.414141

Jennifer Francis (Contact Author)

Duke University ( email )

Fuqua School of Business
Durham, NC 27708
United States
919-660-7817 (Phone)
919-648-2818 (Fax)

Ryan LaFond

Algert Global, LLC ( email )

One Maritime Plaza
Suite 1525
San Francisco, CA 94111
United States

Per Mikael Olsson

Duke University ( email )

Box 90120
Durham, NC 27708-0120
United States

Katherine Schipper

Duke University - Fuqua School of Business

Box 90120
Durham, NC 27708-0120
United States

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