Accruals and the performance of stock returns following external financing activities

Georgios Papanastasopoulos, Dimitrios Thomakos and Tao Wang

The British Accounting Review, 2011, vol. 43, issue 3, 214-229

Abstract: This paper investigates the relation of the external financing anomaly with the accrual anomaly, by focusing separately on working capital accruals and long-term accruals. We find that external financing and accrual hedge portfolios not only generate superior returns, but they also constitute statistical arbitrage opportunities. Portfolio-level analysis and firm-level cross-sectional regressions show that the ability of external financing measures in predicting future returns remains strong, after controlling for working capital accruals. However, this ability is substantially reduced after controlling for long-term accruals. Our results appear to be consistent with investors’ failure to recognise agency-related overinvestment and/or opportunistic earnings management.

Keywords: External financing activities; Accruals; Stock returns (search for similar items in EconPapers)
JEL-codes: G10 M4 (search for similar items in EconPapers)
Date: 2011
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:bracre:v:43:y:2011:i:3:p:214-229

DOI: 10.1016/j.bar.2011.06.007

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