The Market Pricing of Accruals Quality
AbstractWe investigate whether investors price accruals quality, our proxy for the information risk associated with earnings. Measuring accruals quality (AQ) as the standard deviation of residuals from regressions relating current accruals to cash flows, we find that poorer AQ is associated with larger costs of debt and equity. This result is consistent across several alternative specifications of the AQ metric. We also distinguish between accruals quality driven by economic fundamentals ('innate AQ') versus management choices ('discretionary AQ'). Both components have significant cost of capital effects, but innate AQ effects are significantly larger than discretionary AQ effects.
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Bibliographic InfoPaper provided by Institute for Financial Research in its series SIFR Research Report Series with number 22.
Length: 43 pages
Date of creation: 15 Mar 2004
Date of revision:
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Postal: Institute for Financial Research Drottninggatan 89, SE-113 60 Stockholm, Sweden
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Expected return; Information uncertainty; Accounting quality;
Find related papers by JEL classification:
- D89 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Other
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- M49 - Business Administration and Business Economics; Marketing; Accounting - - Accounting - - - Other
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-06-13 (All new papers)
- NEP-FIN-2004-06-13 (Finance)
- NEP-MIC-2004-06-13 (Microeconomics)
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