Is the Accruals Quality Premium Really Only a January Effect?

• In Event: Reception with ELS Posters
  In Poster Session: Research Poster Session I and Friday Reception

Abstract

Mashruwala and Mashruwala [2011] present evidence that previously documented associations between accruals quality (AQ) and the cost of equity capital are driven by returns in the month of January, consistent with a tax-loss selling effect. However, we argue that controlling for low-priced stocks is essential when testing the seasonality of AQ pricing, because the biased returns of these stocks are likely to be systematically related to the tax-loss selling effect described by Mashruwala and Mashruwala [2011]. Consequently, we re-examine seasonality in the pricing of AQ and find that (1) after excluding low-priced stocks, poor AQ firms outperform good AQ in a number of non-January months and collectively across non-January months; (2) within this price-restricted sample, the pricing effect of AQ outside January is concentrated in firms with low market competition for their stock, consistent with an information asymmetry explanation for the observed pricing; and (3) there is a significant AQ premium reflected in the implied cost of equity capital. Overall, our results suggest that AQ is a significant priced risk factor.

Author

• Lijuan Zhang, Australian National University