The Greater Market Mis-Valuation of Accruals When the Stock Performance is Poor
35 Pages Posted: 28 Nov 2005
Date Written: November 24, 2005
I investigate the relationship between contemporaneous stock price performance and the persistence of accrued earnings, and its impact on the accrual anomaly. I find that in a fiscal year, accrued earnings for stocks that have performed poorly are less persistent in predicting future earnings than accrued earnings for stocks that have performed moderately. I further find that a hedge-strategy based on accruals earns greater abnormal returns following bad-news years. The results are consistent with conservative accounting causing accrued earnings to be even less persistent in bad-news year and investors failing to efficiently price this differential in persistence.
Keywords: conservative accounting, accrual anomaly, efficient market
JEL Classification: M41, M44, G12, G14
Suggested Citation: Suggested Citation