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The return premiums to accruals quality

Author

Listed:
  • Sati P. Bandyopadhyay

    (University of Waterloo)

  • Alan Guoming Huang

    (University of Waterloo)

  • Kevin Jialin Sun

    (St. John’s University)

  • Tony S. Wirjanto

    (University of Waterloo)

Abstract

Using a battery of look-ahead-bias free measures of accruals quality (AQ), we find a strong and long-lasting negative relation between future returns and AQ. In decile portfolios that rank on AQ, a hedge portfolio that goes long in the lowest decile and short in the highest decile generates an annualized, risk-adjusted return of 4–12 % over 1-month to 5-year horizons, depending on the AQ measure and the portfolio weighting scheme. The return premiums associated with AQ are, (1) robust to a wide range of AQ measures, (2) robust to a battery of return-informative variables, and (3) not driven by low-priced or small stocks, earnings shocks, or the fourth-quarter effect. The documented premiums are consistent with the information uncertainty effect where firm uncertainty is negatively related to future returns .

Suggested Citation

  • Sati P. Bandyopadhyay & Alan Guoming Huang & Kevin Jialin Sun & Tony S. Wirjanto, 2017. "The return premiums to accruals quality," Review of Quantitative Finance and Accounting, Springer, vol. 48(1), pages 83-115, January.
    • Handle: RePEc:kap:rqfnac:v:48:y:2017:i:1:d:10.1007_s11156-015-0543-z
    DOI: 10.1007/s11156-015-0543-z
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    1. Xuejing Xing & Shan Yan, 2019. "Accounting information quality and systematic risk," Review of Quantitative Finance and Accounting, Springer, vol. 52(1), pages 85-103, January.
    2. Yosr Hrichi & Feten Arfaoui, 2023. "Research and development capitalization, fair value, and earnings management: A study of French listed companies," Journal of Accounting and Management Information Systems, Faculty of Accounting and Management Information Systems, The Bucharest University of Economic Studies, vol. 22(3), pages 569-586, September.

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    More about this item

    Keywords

    Accruals quality; Stock returns; Return premium; Information uncertainty;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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