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Accruals And Momentum

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  • Ming Gu
  • Yangru Wu

Abstract

We view accruals as a natural candidate to link to momentum in the context of the overreaction explanation. Accruals can proxy for ambiguity about the implications of new information for a firm's value and can vary with the business cycle. Thus, higher accruals can lead to greater behavioral biases in the cross‐sectional and time‐series dimensions and, hence, stronger momentum. Our results show that momentum profitability is mostly concentrated in firms with high accruals. The previously documented cross‐sectional characteristics of momentum and market states do not subsume the effect of accruals on momentum. We also find that most of the momentum returns among high‐accrual firms are attributable to high discretionary accruals.

Suggested Citation

  • Ming Gu & Yangru Wu, 2020. "Accruals And Momentum," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 43(1), pages 63-93, March.
    • Handle: RePEc:bla:jfnres:v:43:y:2020:i:1:p:63-93
    DOI: 10.1111/jfir.12201
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    Cited by:

    1. Wouassom, Alain & Muradoğlu, Yaz Gülnur & Tsitsianis, Nicholas, 2022. "Global momentum: The optimal trading approach," Journal of Behavioral and Experimental Finance, Elsevier, vol. 36(C).

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