AAA Spark Meeting of Regions

Accrual Accounting and Risk: Abnormal Sales Growth, Accruals Quality, and Returns

• In Event: Accrual Quality

Abstract

This paper proposes a new business risk proxy, unexpected sales growth (AG), which is measured as the difference between a firm’s sales growth rate in year t and its benchmark, the weighted average of sales growth rate over the past three years. I find that the AG is significantly associated with other measures of risk (e.g., beta, volatility of cash flows, operating cycle, and negative earnings occurrences). I find that the more the sales growth of a firm in current year deviates from its benchmark—the higher business risk the firm—the lower the accrual quality, and the higher future abnormal returns the firm, which support Penman’s (2016) theoretical conclusion that accrual accounting is for risk.

Author

• Min Liu, Brooklyn College