Connecting the dots: the accruals quality premium vs the value premium
Purpose - The purpose of this paper is to investigate the connection between the accrual quality and the growth/value characteristics (and their return premia) at firm level. Design/methodology/approach - The paper employs a battery of univariate and multivariate cross-sectional tests. Fama-MacBeth regressions with main effects and interaction effects are used to identify the relation between accrual quality, book-to-market and returns. The analysis is conducted on the overall sample, as well as after conditioning on up and down markets. Findings - Value (growth) stocks are more likely to be associated with high (low) accrual quality. Value stocks earn higher returns mainly in down markets, while poor accrual quality firms have significantly higher returns during up markets, but significantly lower returns during down markets. There is a significant interaction effect between accrual quality and the value premium, which only exhibits in the down markets (i.e. stocks with poor accrual quality earn a higher value premium in down markets than stocks with good accrual quality). Originality/value - Results in this paper help disentangle between various explanations proposed for the accrual quality premium and the value premium. These findings are consistent with the idea that the same underlying risk factor generating the value premium also generates the cross-sectional variation in accrual quality responsible for the accrual quality premium. From the corporate managers' perspective, the results imply that value firms can mitigate their higher costs of capital by providing high quality of accounting information. From an analyst's perspective, the study suggests that considering both accrual quality and growth characteristics can help make better portfolio allocation decisions than when these are considered separately.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 38 (2012)
Issue (Month): 12 (October)
|Contact details of provider:|| Web page: http://www.emeraldinsight.com|
|Order Information:|| Postal: Emerald Group Publishing, Howard House, Wagon Lane, Bingley, BD16 1WA, UK|
Web: http://emeraldgrouppublishing.com/products/journals/journals.htm?id=mf Email:
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Sloan, Richard G., 1993. "Accounting earnings and top executive compensation," Journal of Accounting and Economics, Elsevier, vol. 16(1-3), pages 55-100, April.
- Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
- Petkova, Ralitsa & Zhang, Lu, 2005. "Is value riskier than growth?," Journal of Financial Economics, Elsevier, vol. 78(1), pages 187-202, October.
- Lee, Gemma & Masulis, Ronald W., 2009. "Seasoned equity offerings: Quality of accounting information and expected flotation costs," Journal of Financial Economics, Elsevier, vol. 92(3), pages 443-469, June.
- Biddle, Gary C. & Hilary, Gilles & Verdi, Rodrigo S., 2009.
"How does financial reporting quality relate to investment efficiency?,"
Journal of Accounting and Economics,
Elsevier, vol. 48(2-3), pages 112-131, December.
- Gilles Hilary & Gary C. Biddle & Rodrigo S. Verdi, 2009. "How Does Financial Reporting Quality Relate to Investment Efficiency?," Post-Print hal-00481731, HAL.
- Isabelle Huault & V. Perret & S. Charreire-Petit, 2007. "Management," Post-Print halshs-00337676, HAL.
- Tarun Chordia, 2001. "Market Liquidity and Trading Activity," Journal of Finance, American Finance Association, vol. 56(2), pages 501-530, 04.
- Richardson, Scott & Tuna, Irem & Wysocki, Peter, 2010. "Accounting anomalies and fundamental analysis: A review of recent research advances," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 410-454, December.
- David Easley & Soeren Hvidkjaer & Maureen O'Hara, 2002. "Is Information Risk a Determinant of Asset Returns?," Journal of Finance, American Finance Association, vol. 57(5), pages 2185-2221, October.
- Murphy, Kevin J., 1999. "Executive compensation," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 38, pages 2485-2563 Elsevier.
- Fama, Eugene F. & French, Kenneth R., 1997. "Industry costs of equity," Journal of Financial Economics, Elsevier, vol. 43(2), pages 153-193, February.
- Ronald Best & Charles Hodges & James Yoder, 2006. "Expected earnings growth and portfolio performance," Review of Quantitative Finance and Accounting, Springer, vol. 26(4), pages 431-437, June.
- Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-465, June.
- David Aboody & John Hughes & Jing Liu, 2005. "Earnings Quality, Insider Trading, and Cost of Capital," Journal of Accounting Research, Wiley Blackwell, vol. 43(5), pages 651-673, December.
- Wei He & Yen-Sheng Lee & Peihwang Wei, 2010. "Do option traders on value and growth stocks react differently to new information?," Review of Quantitative Finance and Accounting, Springer, vol. 34(3), pages 371-381, April.
- Francis, Jennifer & LaFond, Ryan & Olsson, Per & Schipper, Katherine, 2005. "The market pricing of accruals quality," Journal of Accounting and Economics, Elsevier, vol. 39(2), pages 295-327, June.
- Williams, Joseph T., 1977. "Capital asset prices with heterogeneous beliefs," Journal of Financial Economics, Elsevier, vol. 5(2), pages 219-239, November.
- Pettengill, Glenn N. & Sundaram, Sridhar & Mathur, Ike, 1995. "The Conditional Relation between Beta and Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 30(01), pages 101-116, March.
When requesting a correction, please mention this item's handle: RePEc:eme:mfipps:v:38:y:2012:i:12:p:1106-1133. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Virginia Chapman)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.