Accruals Quality, Stock Return Seasonality and Cost of Equity Capital: International Evidence

• In Event: Accruals and Earnings Management in International Settings

Abstract

We examine international evidence of seasonality in the pricing of firms' accrual quality (AQ), following Mashruwala and Mashruwala's (2011) finding that abnormal positive returns to AQ are concentrated around the turn-of-the-tax year for US firms. We employ an international sample comprising large market economies where tax-loss selling incentives exist, but which differ in their tax year end dates. We find that while a turn-of-the-tax year effect does exist in some cases, abnormal returns to AQ and an AQ-based hedge portfolio are positive and significant for the remainder of the year if low-priced stocks are controlled. We further show that the apparent AQ premium concentrates in firms with low market competition for their stock, consistent with an information risk explanation. Finally, we demonstrate that poor AQ is associated with higher implied costs of equity capital. Collectively, our results are consistent with the existence of an AQ premium, which is not singularly driven by tax-loss selling effects.

Authors

• Lijuan Zhang, Australian National University

• Mark Wilson, Australian Naitonal University