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Accrual Accounting and Risk: Abnormal Sales Growth, Accruals Quality, and Returns

In: Encyclopedia of Finance

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  • Liu Min Shirley

    (University of Illinois)

Abstract

This study proposes a new business risk proxy, unexpected sales growth (AG), which is measured as the difference between a firm’s sales growth rate in year t and its benchmark, the weighted average of sales growth rate over the past 3 years. I find that the AG is statistically, economically, significantly associated with other risk measures of risk (e.g., beta, volatility of cash flows, operating cycle, and negative earnings occurrences). I find that the more the sales growth of a firm in the current year deviates from its benchmark – the higher business risk the firm – the lower the accrual quality, and the higher future abnormal returns the firm, which support Penman’s (2016) theoretical conclusion that accrual accounting is for risk.

Suggested Citation

  • Liu Min Shirley, 2022. "Accrual Accounting and Risk: Abnormal Sales Growth, Accruals Quality, and Returns," Springer Books, in: Cheng-Few Lee & Alice C. Lee (ed.), Encyclopedia of Finance, edition 0, chapter 103, pages 2501-2537, Springer.
  • Handle: RePEc:spr:sprchp:978-3-030-91231-4_106
    DOI: 10.1007/978-3-030-91231-4_106
    as

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    More about this item

    Keywords

    Abnormal Sales Growth; Operating Risk; Accruals Quality; Future Returns;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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