Can the earnings fixation hypothesis explain the accrual anomaly?

Linna Shi and Huai Zhang ()
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Linna Shi: State University of New York
Huai Zhang: Nanyang Technological University

Review of Accounting Studies, 2012, vol. 17, issue 1, No 1, 21 pages

Abstract: Abstract This paper provides empirical evidence on whether the earnings fixation hypothesis can explain the accrual anomaly originally documented in Sloan (1996). Our analytical model yields the prediction that, if investors fixate on reported earnings, the effectiveness of the accrual strategy will increase in the responsiveness of the stock price to earnings and the differential persistence of cash flows relative to accruals. Our empirical evidence confirms our prediction and lends support to the earnings fixation hypothesis.

Keywords: Accrual anomaly; Earnings fixation hypothesis; Responsiveness of stock price to earnings; Persistence of cash flows and accruals (search for similar items in EconPapers)
JEL-codes: G12 M41 (search for similar items in EconPapers)
Date: 2012
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DOI: 10.1007/s11142-011-9171-6

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