Access the full text.
Sign up today, get DeepDyve free for 14 days.
M. Bradshaw, Scott Richardson, Richard Sloan (2006)
The Relation between Corporate Financing Activities, Analysts' Forecasts and Stock ReturnsFinancial Accounting eJournal
E. Fama, K. French (1993)
Common risk factors in the returns on stocks and bondsJournal of Financial Economics, 33
J. Lewellen, Robert Resutek (2014)
The predictive power of investment and accrualsReview of Accounting Studies, 21
C. Anderson, Luis García‐Feijóo (2002)
Empirical Evidence on Capital Investment, Growth Options, and Security ReturnsRisk Management eJournal
Contemporary Accounting Research, 33
Journal of Financial Economics, 99
E. Fama, James MacBeth (1973)
Risk, Return, and Equilibrium: Empirical TestsJournal of Political Economy, 81
Jacob Thomas, Huai Zhang (2001)
Inventory Changes and Future ReturnsReview of Accounting Studies, 7
Journal of Financial Economics, 110
Stanley Baiman, Barry Lewis (1989)
AN EXPERIMENT TESTING THE BEHAVIORAL EQUIVALENCE OF STRATEGICALLY EQUIVALENT EMPLOYMENT CONTRACTSJournal of Accounting Research, 27
P. Fairfield, J. Whisenant, T. Yohn (2003)
Accrued Earnings and Growth: Implications for Future Profitability and Market MispricingAccounting review: A quarterly journal of the American Accounting Association, 78
Josef Lakonishok, Andrei Shleifer, Robert Vishny (1993)
Contrarian Investment, Extrapolation, and RiskBehavioral & Experimental Finance
Alon Brav, Christopher Géczy, Paul Gompers (2000)
Is the Abnormal Return Following Equity Issuances AnomalousJournal of Financial Economics, 56
Journal of Financial Economics, 116
Journal of Finance, 60
Journal of Accounting and Economics, 42
Mozaffar Khan (2007)
Are Accruals Mispriced? Evidence from Tests of an Intertemporal Capital Asset Pricing ModelCapital Markets: Asset Pricing & Valuation
K. Wei, Feixue Xie, S. Titman (2001)
Capital Investments and Stock ReturnsJournal of Financial and Quantitative Analysis, 39
P. Healy (2015)
The effects of bonus schemes on accounting decisions
K. Chan, Narasimhan Jegadeesh, L. Chan, Josef Lakonishok (2001)
Earnings Quality and Stock ReturnsS&P Global Market Intelligence Research Paper Series
Journal of Accounting Research, 50
Jeremiah Green, John Hand, Mark Soliman (2011)
Going, Going, Gone? The Apparent Demise of the Accruals AnomalyManag. Sci., 57
Anthony Lynch (1999)
Portfolio Choice and Equity Characteristics: Characterizing the Hedging Demands Induced by Return PredictabilityNYU: Salomon Center (Topic)
Journal of Finance, 56
D. Cohen, Thomas Lys (2006)
Weighing the Evidence on the Relation between External Corporate Financing Activities, Accruals and Stock ReturnsMonetary Economics
Tyler Shumway, Vincent Warther (1999)
The Delisting Bias in CRSP's Nasdaq Data and Its Implications for the Size EffectJournal of Finance, 54
Lu Zhang (2002)
The Value PremiumChina Academy of Financial Research (CAFR) Research Paper Series
J. Cochrane (1996)
A Cross-Sectional Test of an Investment-Based Asset Pricing ModelJournal of Political Economy, 104
M. McNichols (2002)
Discussion of the Quality of Accruals and Earnings: The Role of Accrual Estimation ErrorsAccounting review: A quarterly journal of the American Accounting Association, 77
Kent Daniel, S. Titman (1996)
Evidence on the Characteristics of Cross Sectional Variation in Stock ReturnsNBER Working Paper Series
Y. Amihud (2012)
Market Liquidity: Illiquidity and Stock Returns Cross-Section and Time-Series Effects*
Patricia Dechow, Ilia Dichev (2002)
The Quality of Accruals and Earnings: The Role of Accrual Estimation ErrorsThe Accounting Review, 77
Patricia Dechow, Amy Hutton, J. Kim, Richard Sloan (2011)
Detecting Earnings Management: A New ApproachERN: Econometric Modeling in Financial Economics (Topic)
Journal of Accounting Research, 46
Journal of Finance, 59
E. Fama, K. French (2014)
A Five-Factor Asset Pricing ModelS&P Global Market Intelligence Research Paper Series
Maria Vassalou, Yuhang Xing (2004)
Default Risk in Equity ReturnsDerivatives
E. Fama, K. French (2007)
Dissecting AnomaliesBehavioral & Experimental Finance
Journal of Accounting and Economics, 45
E. Fama, K. French (1992)
The Cross‐Section of Expected Stock ReturnsJournal of Finance, 47
F. Zhang (2007)
Accruals, Investment, and the Accrual AnomalyOrganizations & Markets eJournal
Hong Xie (2001)
THE MISPRICING OF ABNORMAL ACCRUALSThe Accounting Review, 76
Yuhang Xing (2008)
Interpreting the Value Effect Through the Q-Theory: An Empirical InvestigationReview of Financial Studies, 21
Patricia Dechow, Richard Sloan, A. Sweeney (1994)
DETECTING EARNINGS MANAGEMENTAccounting review: A quarterly journal of the American Accounting Association, 70
(1986)
Accounting numbers as market valuation substitutes: a study of management buyouts of public stockholders
Journal of Finance, 63
(2009)
Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches
Jin Wu, Lu Zhang, F. Zhang (2009)
The Q-Theory Approach to Understanding the Accrual AnomalyCapital Markets: Market Efficiency eJournal
Michael Cooper, Huseyin Gulen, Michael Schill (2007)
Asset Growth and the Cross-Section of Stock ReturnsCapital Markets: Asset Pricing & Valuation eJournal
(2007)
The Micro and Macro of Accrual Based Trading Strategies
Journal of Accounting and Economics, 58
L. Liu, Toni Whited, Lu Zhang (2009)
Investment‐Based Expected Stock ReturnsJournal of Political Economy, 117
Patricia Dechow, Richard Sloan (1991)
Executive incentives and the horizon problem: An empirical investigationJournal of Accounting and Economics, 14
Journal of Accounting and Economics, 56
Christopher Polk, Paola Sapienza (2009)
The Stock Market and Corporate Investment: A Test of Catering TheoryReview of Financial Studies, 22
Journal of Finance, 51
G. Aharoni, Bruce Grundy, Qi Zeng (2012)
Stock Returns and the Miller-Modigliani Valuation Formula: Revisiting the Fama-French AnalysisSPGMI: Compustat Fundamentals (Topic)
L. Chan, Narasimhan Jegadeesh, Josef Lakonishok (1995)
Momentum StrategiesCapital Markets: Market Efficiency
Management Science, 58
Kent Daniel, S. Titman (1999)
NBER WORKING PAPER SERIES EXPLAINING THE CROSS-SECTION OF STOCK RETURNS IN JAPAN: FACTORS OR CHARACTERISTICS?
E. Fama, K. French (2006)
Profitability, investment and average returnsJournal of Financial Economics, 82
Jeffrey Pontiff, A. Woodgate (2008)
Share Issuance and Cross‐sectional ReturnsJournal of Finance, 63
James Davis, E. Fama, K. French (1999)
Characteristics , Covariances , and Average Returns : 1929 to 1997
Narasimhan Jegadeesh, S. Titman (1993)
Returns to Buying Winners and Selling Losers: Implications for Stock Market EfficiencyJournal of Finance, 48
Mark Defond, Chul Park (2001)
The Reversal of Abnormal Accruals and the Market Valuation of Earnings SurprisesThe Accounting Review, 76
Journal of Finance, 61
Journal of Financial Economics, 42
Patricia Dechow, Scott Richardson, Richard Sloan (2005)
The Rodney L . White Center for Financial Research The Persistence and Pricing of the Cash Component of Earnings
Mark Defond, J. Jiambalvo (1994)
Debt covenant violation and manipulation of accrualsJournal of Accounting and Economics, 17
Eric Allen, Chad Larson, Richard Sloan (2013)
Accrual Reversals, Earnings and Stock ReturnsCapital Markets: Market Efficiency eJournal
Jenny Chu (2012)
Accruals, Investment, and Future Firm PerformanceS&P Global Market Intelligence Research Paper Series
Scott Richardson, Richard Sloan, Mark Soliman, A. Tuna (2005)
Accrual Reliability, Earnings Persistence and Stock PricesCorporate Finance: Capital Structure & Payout Policies
Scott Richardson, Peter Wysocki, A. Tuna (2010)
Accounting Anomalies and Fundamental Analysis: A Review of Recent Research AdvancesBehavioral & Experimental Accounting (Editor's Choice) eJournal
Journal of Finance, 63
E. Fama, K. French (2007)
Average Returns, B/M, and Share IssuesS&P Global Market Intelligence Research Paper Series
J. Chu (2012)
Accruals, growth, and future firm performance
S. Cao (2011)
Reexamining Growth Effects: Are All Types of Asset Growth the Same?Capital Markets: Market Efficiency eJournal
Robert Resutek (2010)
Intangible Returns, Accruals, and Return Reversal: A Multi-Period Examination of the Accrual AnomalyThe Accounting Review, 85
D. Hirshleifer, Kewei Hou, S. Teoh (2010)
The Accrual Anomaly: Risk or Mispricing?Behavioral & Experimental Finance
J. Cochrane (1991)
Production‐Based Asset Pricing and the Link Between Stock Returns and Economic FluctuationsJournal of Finance, 46
H. White (1980)
A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for HeteroskedasticityEconometrica, 48
S. Thompson (2009)
Simple Formulas for Standard Errors that Cluster by Both Firm and TimeCorporate Finance: Capital Structure & Payout Policies
J. Jones (1991)
Earnings Management During Import Relief InvestigationsJournal of Accounting Research, 29
D. Hirshleifer, Kewei Hou, S. Teoh, Yinglei Zhang (2004)
Do Investors Overvalue Firms with Bloated Balance Sheets?ERN: Experimental Economics (Topic)
K. Subramanyam (1996)
The pricing of discretionary accrualsJournal of Accounting and Economics, 22
V. Bernard, Jacob Thomas (1989)
POST-EARNINGS-ANNOUNCEMENT DRIFT - DELAYED PRICE RESPONSE OR RISK PREMIUMJournal of Accounting Research, 27
Tarun Chordia, A. Subrahmanyam, Qing Tong (2014)
Have Capital Market Anomalies Attenuated in the Recent Era of High Liquidity and Trading Activity?S&P Global Market Intelligence Research Paper Series
Richard Sloan (1998)
Do Stock Prices Fully Reflect Information in Accruals and Cash Flows About Future EarningsThe Accounting Review, 71
Journal of Financial Markets, 5
Patricia Dechow, Natalya Khimich, Richard Sloan (2011)
The Accrual AnomalySPGMI: Compustat Fundamentals (Topic)
Journal of Finance, 63
Journal of Accounting and Economics, 50
For most companies, growth measures such as asset growth are positively correlated with accrual measures. Just like investment in fixed assets, current accrual represents one form of investment and is an integral part of a firm’s business growth. This makes it difficult to distinguish between the growth-based and earnings quality-based interpretations of the accrual effects, because high accruals can represent both high growth and inflated earnings. The purpose of this paper is to add to the literature by examining an issue that has not received much attention: the correlation between asset growth and accruals and its implication on stock return predictability. The authors address the issue using Fama and Macbeth’s (1973) cross-sectional regressions that are conditional on the correlations between the two variables.Design/methodology/approachThe authors partition firms based on whether the correlation between current accrual and asset growth in the past five years is positive (ρ+) or negative (ρ−). The authors refer to these two types of firms such as “positive correlation” and “negative correlation” groups. For both groups, the authors examine whether firms with higher asset growth and higher accruals are associated with lower future stock returns. The authors implement Fama and MacBeth’s cross-sectional regressions incorporating the effect of correlations between growth and accrual measures. In addition, the authors regress hedge portfolio returns on Fama and French (1993) three-factor and Fama and French (2015) five-factor models to see if the intercepts (a’s) from these regressions are significantly different from 0.FindingsFor each year, the authors partition firms based on whether the correlation between asset growth and current accrual is positive or negative. For both the “positive correlation” and “negative correlation” firms, the authors examine the association between accruals and future stock returns. The authors find that accruals remain strong in predicting future stock returns for both groups. The accrual effects from the “negative correlation” group cannot be attributed to the growth-based hypothesis because for these firms, when accruals are high, growth measures tend to be relatively low and vice versa. The effects are most likely driven by the alternative hypothesis that investors overvalue the accrual part of earnings.Research limitations/implicationsThere exist a few issues when investors actually implement these strategies. These include liquidity costs, institutional holdings and short sale constraints. Lesmond (2008) concludes that the bulk of the trading profits is derived from the short side of the trade, but that this position suffers from high liquidity costs that reduces institutional holdings with consequent short sale constraints. The net gains after taking into account these issues remain an open question be addressed in the future.Practical implicationsThe empirical results indicate that investors can do an implementable portfolio strategy of going long for a year on an initially equally weighted lowest asset growth (accrual) decile portfolio and going short for a year on an initially equally weighted highest asset growth (accrual) decile portfolio, which produces significant abnormal returns. The results further show that these abnormal returns can be improved if investors classify stocks into “the positive correlation” and “negative correlation” groups and implement trading similar trading strategies.Originality/valueThe empirical evidence finds that firm-year observations that exhibit a negative correlation between growth and accrual measures represents a significant 30 percent of the total firm-year observations during the sample period from July 1974 to June 2017. This highlights the necessity to undertake a detailed analysis on the issue. The authors continue to find accrual effects among these groups of firms. Therefore, the accrual effect cannot be attributed to the diminishing marginal return hypothesis. This is the main contribution of the paper.
China Finance Review International – Emerald Publishing
Published: Aug 16, 2019
Keywords: Accrual effect; Growth effect; Stock return predictability; G14; M41
Read and print from thousands of top scholarly journals.
Already have an account? Log in
Bookmark this article. You can see your Bookmarks on your DeepDyve Library.
To save an article, log in first, or sign up for a DeepDyve account if you don’t already have one.
Copy and paste the desired citation format or use the link below to download a file formatted for EndNote
Access the full text.
Sign up today, get DeepDyve free for 14 days.
All DeepDyve websites use cookies to improve your online experience. They were placed on your computer when you launched this website. You can change your cookie settings through your browser.