Do Accruals Drive Firm-Level Stock Returns? A Variance Decomposition Analysis

Posted: 13 Feb 2004

See all articles by Jeffrey L. Callen

Jeffrey L. Callen

University of Toronto - Rotman School of Management

Dan Segal

Interdisciplinary Center (IDC) Herzliyah

Abstract

This paper extends the variance decomposition framework of Campbell (1991), Campbell and Ammer (1993) and Vuolteenaho (2002) to address the relative value relevance of accrual news, cash flow news and expected return news in driving firm-level equity returns. The extension is based on the Feltham-Ohlson (1995, 1996) clean surplus relations. Using three models, this study shows that all three factors, accruals, cash flows and expected future discount rates are value relevant. Moreover, accrual news is found to significantly dominate expected-return news in driving firm-level stock returns. Operating income news is also found to significantly dominate both expected-return news and free cash flow news in driving firm-level stock returns. Furthermore, after splitting net income into cash flow and accrual earnings components in the Vuolteenaho (2002) model, accrual earnings news and cash flow earnings news are found to equally drive firm-level stock returns and to dominate expected-return news. Further disaggregation of the data yields some evidence that accrual earnings news is a more important factor than cash flow earnings news in driving current stock returns. Overall, the three models indicate that changes in expected future accruals are a primary driver, if not the primary driver, of current stock returns.

Keywords: Accruals, Valuation, Variance Decomposition

JEL Classification: M41, G12

Suggested Citation

Callen, Jeffrey L. and Segal, Dan, Do Accruals Drive Firm-Level Stock Returns? A Variance Decomposition Analysis. Available at SSRN: https://ssrn.com/abstract=499562

Jeffrey L. Callen (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada
416-946-5641 (Phone)
416-971-3048 (Fax)

Dan Segal

Interdisciplinary Center (IDC) Herzliyah ( email )

P.O. Box 167
Herzliya, 46150
Israel

Here is the Coronavirus
related research on SSRN

Paper statistics

Abstract Views
1,655
PlumX Metrics