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Fundamentals and the accruals puzzle

Author

Listed:
  • Javier Gómez Biscarri

    (IESE Business School)

  • Germán López Espinosa

    (Universidad de Navarra)

Abstract

We investigate whether there is an economic relationship between accruals and fundamentals. Our study is the first one to evaluate the profitability and persistence of an accrual factor, to analyze whether changes in fundamentals are explained by changes in accruals, and whether an accrual factor in fundamentals is the source of the accrual factor in returns, that is, if the accrual factor in fundamentals is driving stock returns. Our results show evidence of a relationship between fundamentals and accruals, a relationship that is persistent over time. Furthermore, we find that a Size, BTM and an accrual factor in sales seem to be driving stock returns: returns are driven by changes in sales and not by other fundamentals. Also, we show that future sales growth is correlated with stock returns and that accruals and cash flows contain valuable information for predicting future changes in sales. Finally, our results indicate that the accrual factor behaves similarly to the Size and BTM factors in terms of sensitivities and risk premiums. A natural corollary of the study reconciles some conflicting results obtained by the accruals literature: our results imply that the performance of an accruals-based strategy is not comparable directly to an OCF-based strategy because the former is adjusted by accounting quality risk whereas the latter is not.

Suggested Citation

  • Javier Gómez Biscarri & Germán López Espinosa, 2008. "Fundamentals and the accruals puzzle," Faculty Working Papers 02/08, School of Economics and Business Administration, University of Navarra.
    • Handle: RePEc:una:unccee:wp0208
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    References listed on IDEAS

    as
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