Accrual Accounting and Risk: Abnormal Sales Growth, Accruals Quality, and Returns

Liu Min Shirley ()
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Liu Min Shirley: University of Illinois

Chapter 103 in Encyclopedia of Finance, 2022, pp 2501-2537 from Springer

Abstract: Abstract This study proposes a new business risk proxy, unexpected sales growth (AG), which is measured as the difference between a firm’s sales growth rate in year t and its benchmark, the weighted average of sales growth rate over the past 3 years. I find that the AG is statistically, economically, significantly associated with other risk measures of risk (e.g., beta, volatility of cash flows, operating cycle, and negative earnings occurrences). I find that the more the sales growth of a firm in the current year deviates from its benchmark – the higher business risk the firm – the lower the accrual quality, and the higher future abnormal returns the firm, which support Penman’s (2016) theoretical conclusion that accrual accounting is for risk.

Keywords: Abnormal Sales Growth; Operating Risk; Accruals Quality; Future Returns (search for similar items in EconPapers)
JEL-codes: G10 G11 M40 M41 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-3-030-91231-4_106

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DOI: 10.1007/978-3-030-91231-4_106

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