Distress Risk Information in Accruals

45 Pages Posted: 7 Feb 2005  

Jeffrey Ng

Hong Kong Polytechnic University - School of Accounting and Finance

Date Written: August 3, 2005

Abstract

Past accruals anomaly studies have documented results that suggest that distress risk increases systematically across decreasing accruals portfolios. I investigate and find a negative relation between accruals and distress risk, evidence that suggests that the accruals trading strategy of buying firms with low accruals and selling firms with high accruals results in exposure to higher distress risk. I show that distress risk is compensated by higher future returns. I then show that the future abnormal returns from the accruals trading strategy decline after controlling for distress risk. This evidence suggests that that at least part of the high abnormal returns to the accruals trading strategy should be reclassified as normal returns for engaging in a trading strategy that involves higher distress risk. In addition, I find that the abnormal returns to the accruals trading strategy are largely driven by trading in firms within high distress risk portfolios.

Keywords: Accruals, asset pricing, distress risk, market efficiency, mispricing

JEL Classification: G12, G14, G33, M41, M43

Suggested Citation

Ng, Jeffrey, Distress Risk Information in Accruals (August 3, 2005). Available at SSRN: https://ssrn.com/abstract=662602 or http://dx.doi.org/10.2139/ssrn.662602

Jeffrey Ng (Contact Author)

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

Hung Hom
Kowloon
Hong Kong

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