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Who, if anyone, reacts to accrual information?

Author

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  • Battalio, Robert H.
  • Lerman, Alina
  • Livnat, Joshua
  • Mendenhall, Richard R.

Abstract

We show that the vast majority of investors ignore value-relevant accruals information when it is first released, but that investors who initiate trades of at least 5,000 shares tend to transact in the proper direction. These investors trade on accruals information only when the previously-announced earnings signal is non-negative. Unconditionally, those investors initiating the smallest trades appear to respond to accruals in the wrong direction, but further investigation suggests this behavior is explained by their attraction to attention-grabbing stocks. Finally, we find that those who trade on accruals information have insufficient market power to mitigate the accruals anomaly.

Suggested Citation

  • Battalio, Robert H. & Lerman, Alina & Livnat, Joshua & Mendenhall, Richard R., 2012. "Who, if anyone, reacts to accrual information?," Journal of Accounting and Economics, Elsevier, vol. 53(1), pages 205-224.
    • Handle: RePEc:eee:jaecon:v:53:y:2012:i:1:p:205-224
    DOI: 10.1016/j.jacceco.2011.06.007
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    Cited by:

    1. Alina Lerman, 2020. "Individual Investors' Attention to Accounting Information: Evidence from Online Financial Communities," Contemporary Accounting Research, John Wiley & Sons, vol. 37(4), pages 2020-2057, December.
    2. Forough Heirany & Mahmoud Moeinadin & Manije Nazemizadeh, 2014. "The Role of Accrual Decomposition in Increasing the Information Value," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 4(1), pages 309-318, January.
    3. William Cready & Abdullah Kumas & Musa Subasi, 2014. "Are Trade Size‐Based Inferences About Traders Reliable? Evidence from Institutional Earnings‐Related Trading," Journal of Accounting Research, Wiley Blackwell, vol. 52(4), pages 877-909, September.
    4. S. P. Kothari & Charles Wasley, 2019. "Commemorating the 50‐Year Anniversary of Ball and Brown (1968): The Evolution of Capital Market Research over the Past 50 Years," Journal of Accounting Research, Wiley Blackwell, vol. 57(5), pages 1117-1159, December.
    5. Pervaiz Alam & Xiaoling Pu & Barry Hettler & Hai Lin, 2020. "The pricing of accruals quality in credit default swap spreads," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 60(3), pages 1943-1977, September.
    6. Bin Miao & Siew Hong Teoh & Zinan Zhu, 2016. "Limited attention, statement of cash flow disclosure, and the valuation of accruals," Review of Accounting Studies, Springer, vol. 21(2), pages 473-515, June.
    7. Blankespoor, Elizabeth & deHaan, Ed & Marinovic, Iván, 2020. "Disclosure processing costs, investors’ information choice, and equity market outcomes: A review," Journal of Accounting and Economics, Elsevier, vol. 70(2).
    8. Chad R. Larson & Richard Sloan & Jenny Zha Giedt, 2018. "Defining, measuring, and modeling accruals: a guide for researchers," Review of Accounting Studies, Springer, vol. 23(3), pages 827-871, September.
    9. Martineau, Charles, 2021. "Rest in Peace Post-Earnings Announcement Drift," SocArXiv z7k3p, Center for Open Science.
    10. Joseph R. Rakestraw & Raman Kumar & John J. Maher, 2020. "Industry-Average Earnings Management and IPO Pricing," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 22(04), pages 1-46, January.

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    More about this item

    Keywords

    Market efficiency; Anomalies; Accruals; Earnings;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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