Accrual quality, skill, and the cross-section of mutual fund returns
Suresh Nallareddy () and
Maria Ogneva ()
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Suresh Nallareddy: Duke University
Maria Ogneva: University of Southern California
Review of Accounting Studies, 2017, vol. 22, issue 2, No 1, 503-542
Abstract We use returns of actively managed mutual funds to document the link between accrual quality (AQ) and systematic (priced) risk. Despite compelling theoretical arguments, prior research finds no evidence that poor AQ commands a risk premium in the cross-section of realized stock returns. We argue that the previously obtained premium estimates are biased downward because, for a large portion of poor AQ stocks, higher expected returns are offset by the news of deteriorating fundamentals. We suggest that skilled mutual fund managers should be able to either avoid investing in stocks with deteriorating fundamentals or assign them lower portfolio weights. As a consequence, returns on their portfolios should better reflect the expected AQ risk premium. Our empirical evidence is consistent with these predictions.
Keywords: Accrual quality; Cost of capital; Expected returns; Mutual funds; Skill (search for similar items in EconPapers)
JEL-codes: M41 G11 G12 G23 (search for similar items in EconPapers)
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