Accounting Anomalies and Information Uncertainty

Jennifer Francis, Ryan LaFond, Per Olsson () and Katherine Schipper
Additional contact information
Jennifer Francis: Duke University
Ryan LaFond: University of Wisconsin
Per Olsson: Fuqua School of Business, Postal: Duke University, Box 90120, Durham, NC 27708 USA
Katherine Schipper: Financial Accounting Standards Board

No 13, SIFR Research Report Series from Institute for Financial Research

Abstract: We examine whether rational investor responses to information uncertainty explain properties of and returns to accounting-based trading anomalies. We proxy for information uncertainty with two measures of earnings quality: the standard deviation of the residuals from a Dechow and Dichev (2002) model relating accruals to cash flows, and the absolute value of performance-adjusted abnormal accruals from a modified Jones (1991) model. Over 1982-2001, we find that accounting-based trading anomalies (post-earnings announcement drift, value-glamour, and accruals strategies) are correlated with earnings quality. Specifically, extreme anomaly portfolios have poorer earnings quality than non-extreme portfolios, and within the extreme anomaly portfolios, poor earnings quality securities are more prevalent and earn larger abnormal returns than good earnings quality securities. Consistent with greater resolution of uncertainty for poor earnings quality securities, the abnormal returns to poor quality securities converge to the abnormal returns to good quality securities as the post-portfolio formation period lengthens. Taken as a whole, these results indicate that information uncertainty plays an important role in explaining accounting anomalies.

Keywords: Information; Cost of capital; Returns anomalies; Trading strategies (search for similar items in EconPapers)
JEL-codes: D82 G14 M41 (search for similar items in EconPapers)
Pages: 53 pages
Date: 2003-06-15
New Economics Papers: this item is included in nep-cfn
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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