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The impact of accounting information quality on the mispricing of accruals: The case of FRS3 in the UK


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  • Chan, Ann L-C
  • Lee, Edward
  • Lin, Stephen
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    We exploit a unique setting of accounting regulation change to examine how accounting information quality affects the well-documented accrual anomaly. We show a significant reduction in the negative return predictability of accruals among UK companies with poorer accounting information quality following the introduction of Financial Reporting Standard No. 3: Reporting Financial Performance (FRS3). While the functional fixation hypothesis attributes the mispricing of accruals to the judgemental error of end-users of information, our findings suggest that the supply side of information also plays a crucial role. Our results provide evidence that regulatory interventions seeking to improve accounting information quality can reduce the mispricing of securities in the capital market.

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    Article provided by Elsevier in its journal Journal of Accounting and Public Policy.

    Volume (Year): 28 (2009)
    Issue (Month): 3 (May)
    Pages: 189-206

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    Handle: RePEc:eee:jappol:v:28:y:2009:i:3:p:189-206

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    Keywords: Accrual anomaly Accrual quality FRS3;

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    Cited by:
    1. Venter, Elmar R. & Cahan, Steven F. & Emanuel, David, 2013. "Mandatory Earnings Disaggregation and the Persistence and Pricing of Earnings Components," The International Journal of Accounting, Elsevier, vol. 48(1), pages 26-53.


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