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Accruals and future performance: Can it be attributed to risk?

Author

Listed:
  • Francesco Momente’

    (Bocconi University)

  • Francesco Reggiani

    (Bocconi University)

  • Scott Richardson

    (AQR Capital Management LLC)

Abstract

We decompose broad-based measures of accruals into firm-specific and related-firm components. We find that the negative relation between accruals and future firm performance is almost entirely attributable to the firm-specific component. Standard risk-based explanations are hard to reconcile with this fact. To the extent expected returns have a common component spanning related firms, a risk-based explanation would suggest a stronger negative relation between accruals and future firm performance when related firms are also growing. Instead, the attenuation we document is more likely attributable to suboptimal investment decisions, which the stock market and analysts do not incorporate in a timely manner.

Suggested Citation

  • Francesco Momente’ & Francesco Reggiani & Scott Richardson, 2015. "Accruals and future performance: Can it be attributed to risk?," Review of Accounting Studies, Springer, vol. 20(4), pages 1297-1333, December.
    • Handle: RePEc:spr:reaccs:v:20:y:2015:i:4:d:10.1007_s11142-015-9319-x
    DOI: 10.1007/s11142-015-9319-x
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    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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