The "q"-Theory Approach to Understanding the Accrual Anomaly
ABSTRACT Interpreting accruals as working capital investment, we hypothesize based on "q"-theory that firms optimally adjust their accruals in response to discount rate changes. A higher discount rate means less profitable investments and lower accruals, and a lower discount rate means more profitable investments and higher accruals. Our evidence supports this optimal investment hypothesis: (1) adding an investment factor into standard factor regressions substantially reduces the magnitude of the accrual anomaly, often to insignificant levels; (2) accruals covary negatively with discount rate estimates from the dividend discounting model, and for the most part, with estimates from the residual income model; (3) accruals with low accounting reliability covary more with capital investment than accruals with high accounting reliability; and (iv) expected returns to accruals-based trading strategies are time-varying, suggesting that the deterioration of the accrual effect in recent years might be temporary and likely to mean-revert in the near future. Copyright (c), University of Chicago on behalf of the Accounting Research Center, 2009.
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Volume (Year): 48 (2010)
Issue (Month): 1 (03)
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