The market pricing of accruals quality

The market pricing of accruals quality We investigate whether investors price accruals quality, our proxy for the information risk associated with earnings. Measuring accruals quality ( AQ ) as the standard deviation of residuals from regressions relating current accruals to cash flows, we find that poorer AQ is associated with larger costs of debt and equity. This result is consistent across several alternative specifications of the AQ metric. We also distinguish between accruals quality driven by economic fundamentals (innate AQ ) versus management choices (discretionary AQ ). Both components have significant cost of capital effects, but innate AQ effects are significantly larger than discretionary AQ effects. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Accounting and Economics Elsevier

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Publisher
Elsevier
Copyright
Copyright © 2005 Elsevier B.V.
ISSN
0165-4101
D.O.I.
10.1016/j.jacceco.2004.06.003
Publisher site
See Article on Publisher Site

Abstract

We investigate whether investors price accruals quality, our proxy for the information risk associated with earnings. Measuring accruals quality ( AQ ) as the standard deviation of residuals from regressions relating current accruals to cash flows, we find that poorer AQ is associated with larger costs of debt and equity. This result is consistent across several alternative specifications of the AQ metric. We also distinguish between accruals quality driven by economic fundamentals (innate AQ ) versus management choices (discretionary AQ ). Both components have significant cost of capital effects, but innate AQ effects are significantly larger than discretionary AQ effects.

Journal

Journal of Accounting and EconomicsElsevier

Published: Jun 1, 2005

References

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