Accruals and Future Performance: Can It Be Attributed to Risk?

• In Event: Behavioral Implications of Accruals

Abstract

We decompose broad based measures of accruals into firm specific and related firm
components. We find that the negative relation between accruals and future firm
performance is almost entirely attributable to the firm specific component. Standard
risk based explanations are hard to reconcile with this fact. To the extent expected
returns have a common component spanning related firms, a risk based explanation
would suggest a stronger negative relation between accruals and future firm
performance when related firms are also growing. Instead, the attenuation we
document is more likely attributable to sub-optimal investment decisions, which the
stock market and analysts do not incorporate in a timely manner.

Author

• Francesco Reggiani, Bocconi University