Evidence on the Relation between Accounting Comparability and Stock Price Efficiency from Accrual and PEAD Anomalies

• In Event: Stock Prices and Creditor Monitoring

Abstract

We examine whether accounting comparability is associated with the mispricing of accruals and unexpected earnings. Using cross-sectional regressions, we document evidence that returns to these anomalies are statistically and economically lower for firms with high accounting comparability than for firms with low comparability. Our results are robust to adding controls for size, book-to-market, momentum, return reversal, idiosyncratic return volatility, liquidity, economic similarity, several earnings and cash flow properties, life-cycle, and analyst coverage. Collectively, the evidence suggests that information in accruals and unexpected earnings is incorporated into prices in a more timely and complete manner for firms with higher comparability. This is consistent with the presumption held by standard setters, regulators, and practitioners that comparability enhances the usefulness of accounting information.

Authors

• Irfan Safdar, Widener University

• Anwer S Ahmed, Texas A&M University

• Michael Neel, University of Houston