The impact of accounting information quality on the mispricing of accruals: The case of FRS3 in the UK

Chan, Ann L-C, Edward Lee and Stephen Lin

Journal of Accounting and Public Policy, 2009, vol. 28, issue 3, pages 189-206

Abstract: We exploit a unique setting of accounting regulation change to examine how accounting information quality affects the well-documented accrual anomaly. We show a significant reduction in the negative return predictability of accruals among UK companies with poorer accounting information quality following the introduction of Financial Reporting Standard No. 3: Reporting Financial Performance (FRS3). While the functional fixation hypothesis attributes the mispricing of accruals to the judgemental error of end-users of information, our findings suggest that the supply side of information also plays a crucial role. Our results provide evidence that regulatory interventions seeking to improve accounting information quality can reduce the mispricing of securities in the capital market.

Keywords: Accrual; anomaly; Accrual; quality; FRS3 (search for similar items in EconPapers)
Date: 2009

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Persistent link: http://EconPapers.repec.org/RePEc:eee:jappol:v:28:y:2009:i:3:p:189-206

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