Research Design Issues and Related Inference Problems Underlying Tests of the Market Pricing of Accounting Information

61 Pages Posted: 13 Aug 2004

See all articles by Arthur G. Kraft

Arthur G. Kraft

City University London - Cass Business School

Andrew J. Leone

University of Miami

Charles E. Wasley

Simon School, University of Rochester

Date Written: March 26, 2004

Abstract

Numerous accounting studies conduct tests of the market pricing of accounting information. The purpose of this study is to both highlight and quantify the consequences of using of ex-post information to form trading strategies based on accounting numbers and to document the importance of performing robustness tests (such as a careful analysis of outliers), when testing economic or behavioral explanations for apparent accounting-related (mis)pricing. To illustrate the importance of these issues we focus on the accrual anomaly (see Sloan 1996). We show that correcting for common sample selection biases not only reduces the magnitude of the abnormal returns to the hedge portfolio, but also dramatically alters the abnormal returns attributable to the high and low accrual portfolios. After eliminating outliers we document an inverted U-shaped relation between buy-and-hold abnormal returns and accruals. This result, combined with a detailed examination of both the truncated sample and the outliers, leads us to conclude that it is neither investors' inability to process accounting information (Sloan 1996) nor their excessive optimism with respect to glamour stocks (Desai, et al 2004) that explains the accrual and operating cash flow anomalies.

JEL Classification: M41, M43, G12, G14, C10

Suggested Citation

Kraft, Arthur Gerald and Leone, Andrew J. and Wasley, Charles E., Research Design Issues and Related Inference Problems Underlying Tests of the Market Pricing of Accounting Information (March 26, 2004). Simon School Working Paper No. FR 04-15. Available at SSRN: https://ssrn.com/abstract=576183 or http://dx.doi.org/10.2139/ssrn.576183

Arthur Gerald Kraft (Contact Author)

City University London - Cass Business School ( email )

London, EC2Y 8HB
Great Britain

Andrew J. Leone

University of Miami ( email )

School of Business
Coral Gables, FL 33146
United States
305-284-3101 (Phone)

HOME PAGE: http://sbaleone.bus.miami.edu

Charles E. Wasley

Simon School, University of Rochester ( email )

Rochester, NY 14627
United States
585-275-3362 (Phone)
585-442-6323 (Fax)

Register to save articles to
your library

Register

Paper statistics

Downloads
958
Abstract Views
5,004
rank
23,058
PlumX Metrics