Can the Earnings Fixation Hypothesis Explain the Accrual Anomaly?

32 Pages Posted: 28 Feb 2007 Last revised: 7 Jan 2013

See all articles by Linna Shi

Linna Shi

University of Cincinnati - Lindner College of Business

Huai Zhang

Nanyang Technological University (NTU)

Date Written: December 15, 2010

Abstract

This paper provides empirical evidence on whether the earnings fixation hypothesis can explain the accrual anomaly originally documented in Sloan (1996). Our analytical model yields the prediction that if investors fixate on reported earnings, the effectiveness of the accrual strategy will increase in the responsiveness of the stock price to earnings and the differential persistence of cash flows relative to accruals. Our empirical evidence confirms our prediction and lends support to the earnings fixation hypothesis.

Keywords: Accrual anomaly, Earnings fixation hypothesis, Responsiveness of stock price to earnings, Persistence of cash flows and accruals

JEL Classification: G12, M41

Suggested Citation

Shi, Linna and Zhang, Huai, Can the Earnings Fixation Hypothesis Explain the Accrual Anomaly? (December 15, 2010). Review of Accounting Studies, Vol. 17, Issue 1, 1-21, 2012, Available at SSRN: https://ssrn.com/abstract=965601

Linna Shi

University of Cincinnati - Lindner College of Business ( email )

P.O. Box 210211
Cincinnati, OH 45221-0211
United States
(513) 556-2097 (Phone)

Huai Zhang (Contact Author)

Nanyang Technological University (NTU) ( email )

Nanyang Business School
50 Nanyang Ave.
Singapore, 639798
Singapore
+65-6790-4097 (Phone)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
721
Abstract Views
3,253
rank
41,804
PlumX Metrics