Predicting Stock Market Returns with Aggregate Discretionary Accruals

Abstract

We document that the value-weighted aggregate discretionary accruals have significant power in predicting the one-year-ahead stock market returns between 1965 and 2004. The predictive relation is stable and robust to different ways to measure market returns and discretionary accruals as well as to the inclusion of other known return predictors. The value-weighted aggregate discretionary accruals are positively related to future stock market returns and negatively correlated with contemporaneous market returns. Our extensive analysis favors the managerial equity market timing story and suggests that managers of large firms have stronger market timing ability than managers of small firms.

Keywords: aggregate discretionary accruals, time-varying risk premium, predictive regressions, managerial market timing

JEL Classification: G1, M4