Understanding the Accrual Anomaly

Jin Ginger Wu, Lu Zhang () and X. Frank Zhang

No 13525, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Interpreting accruals as working capital investment, we hypothesize that firms rationally adjust their investment to respond to discount rate changes. Consistent with the optimal investment hypothesis, we document that (i) the predictive power of accruals for future stock returns increases with the covariations of accruals with past and current stock returns, and (ii) adding investment- based factors into standard factor regressions substantially reduces the magnitude of the accrual anomaly. High accrual firms also have similar corporate governance and entrenchment indexes as low accrual firms. This evidence suggests that the accrual anomaly is more likely to be driven by optimal investment than by investor overreaction to excessive growth or over-investment.

JEL-codes: G12 G14 G31 G34 M41 (search for similar items in EconPapers)
Date: 2007-10
New Economics Papers: this item is included in nep-acc and nep-bec
Note: AP
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Citations: View citations in EconPapers (3)

Published as WU, J., ZHANG, L. and ZHANG, X. F. (2010), The q-Theory Approach to Understanding the Accrual Anomaly. Journal of Accounting Research, 48: 177–223. doi: 10.1111/j.1475-679X.2009.00353.x

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