The Market Pricing of Accruals Quality

Jennifer Francis (), Ryan LaFond, Per Olsson and Katherine Schipper
Additional contact information
Jennifer Francis: Fuqua School of Business, Duke University, Postal: Durham, NC 27708, USA
Ryan LaFond: University of Wisconsin
Per Olsson: Duke University
Katherine Schipper: Financial Accounting Standards Board

No 22, SIFR Research Report Series from Institute for Financial Research

Abstract: We investigate whether investors price accruals quality, our proxy for the information risk associated with earnings. Measuring accruals quality (AQ) as the standard deviation of residuals from regressions relating current accruals to cash flows, we find that poorer AQ is associated with larger costs of debt and equity. This result is consistent across several alternative specifications of the AQ metric. We also distinguish between accruals quality driven by economic fundamentals ('innate AQ') versus management choices ('discretionary AQ'). Both components have significant cost of capital effects, but innate AQ effects are significantly larger than discretionary AQ effects.

Keywords: Expected return; Information uncertainty; Accounting quality (search for similar items in EconPapers)
JEL-codes: D89 G12 M49 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2004-03-15
New Economics Papers: this item is included in nep-fin and nep-mic
References: Add references at CitEc
Citations: View citations in EconPapers (8)

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