A Bad State of Accruals: Does Inter-Temporal Variation Explain the Accruals Premium?

• In Event: Financial Accounting and Reporting I

Abstract

We examine the profitability of the accrual anomaly over time and document that it varies systematically with cross-sectional return dispersion (RD). Further, counter to recent literature, we find that this anomaly has not disappeared in recent years. In the cross section, low accrual firms have significantly higher exposure to the risk captured by RD compared to their high accrual counterparts, suggesting that low accrual firms become riskier in states with high RD. We argue that RD captures states of the aggregate economy related to fluctuations in discount rates, which create incentives/disincentives to invest. In light of the strong connection between RD and accrual based returns and of the evidence that accruals contain fundamental investment information, we interpret our evidence as supporting the hypothesis that the accrual anomaly is a manifestation of countercyclical risk pricing.

Authors

• Anthony Dewayne Holder, University of Toledo

• Doina C. Chichernea, University of Toledo

• Alexey Petkevich, University of Toledo