Research output : Working paper. N2 - Using quarterly data, we develop a two-step procedure to detect accrual initiations in a quarter and trace their reversals in a future quarter. Our tests yield two key results: a strong evidence of the accrual anomaly over the period from the accrual initiation to reversal, but not thereafter; and b the anomaly ends only when accruals reverse and not when an extreme change in cash from operations occurs before accruals reverse. These results provide more complete and more convincing evidence consistent with the fixation explanation than that provided by prior studies.
Effects of institutional factors on the accruals anomaly in Latin America
Accrual anomaly and accounting standards | Semantic Scholar
N2 - We show that the agency theory of overvalued equity see Jensen, rather than investors' fixation on accruals explains the accrual anomaly, i. Under the agency theory of overvalued equity, managers of overvalued firms are likely to manage their firms' accruals upwards to prolong the overvaluation. Thus, high-accrual portfolios are likely to be over-represented with over-valued firms. Overvaluation, however, cannot be sustained indefinitely and we expect price reversals for high accrual firms. In contrast, undervalued firms do not face incentives to report low accruals, so undervalued firms are not concentrated in low accrual decile portfolios. Therefore, across the accrual decile portfolios, we predict and find an asymmetric relation between accruals and both prior and subsequent returns.
Accruals and Future Performance: Can It Be Attributed to Risk?
This paper provides empirical evidence on whether the earnings fixation hypothesis can explain the accrual anomaly originally documented in Sloan 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.
Accounting information is Important source of information for stock investors pricing, and accrual-based accounting is the main way to achieve this objective. Sloan found the smaller coefficient on accruals relative to cash flows reflects the lower persistence, and that investors did not fully understand this phenomenon. Then much paper hale been written to interpret this anomaly.