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| Title: | Understanding the Accrual Anomaly |
| Authors: | Zhang, Lu |
| Other Contributor(s): | Wu, Jin Ginger
Zhang, X. Frank |
| Keywords: | The accruals anomaly
total accruals
discretionary accruals
net operating assets
investment-based asset pricing
capital investment
time-varying expected returns |
| Issue Date: | Jan-2008 |
| Abstract: | Interpreting accruals as working capital investment, we hypothesize that firms optimally adjust
their capital investment in response to discount rate changes. Consistent with the discount-rate
hypothesis, we document that (i) the predictive power of accruals for future returns increases
with the correlations of accruals with past and current stock returns; (ii) controlling for invest-
ment substantially reduces the magnitude of the accrual anomaly; (iii) the ex-ante expected
returns of various accrual strategies have been stable at around 5% per annum over the past 35
years; (iv) the accounting reliability of various accrual components is inversely related to their
cross-correlations with investment-to-assets; and finally (v) high accrual firms have similar cor-
porate governance and entrenchment indexes as low accrual firms, suggesting that the accrual
anomaly is unlikely to be driven by investor overreaction to over-investment. |
| URI: | http://hdl.handle.net/2027.42/56244 |
| Other Identifiers: | 1100 |
| ???metadata.dc.subject.classification???: | Finance |
| Appears in Collections: | Ross School of Business - Working Papers Series
Ross School of Business
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