Can the Earnings Fixation Hypothesis Explain the Accrual Anomaly?
32 Pages Posted: 28 Feb 2007 Last revised: 7 Jan 2013
Date Written: December 15, 2010
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: Suggested Citation