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The Market Pricing of Accruals Quality

Author

Listed:
  • Francis, Jennifer

    () (Fuqua School of Business, Duke University)

  • LaFond, Ryan

    (University of Wisconsin)

  • Olsson, Per

    (Duke University)

  • Schipper, Katherine

    (Financial Accounting Standards Board)

Abstract

We investigate whether investors price accruals quality, our proxy for the information risk associated with earnings. Measuring accruals quality (AQ) as the standard deviation of residuals from regressions relating current accruals to cash flows, we find that poorer AQ is associated with larger costs of debt and equity. This result is consistent across several alternative specifications of the AQ metric. We also distinguish between accruals quality driven by economic fundamentals ('innate AQ') versus management choices ('discretionary AQ'). Both components have significant cost of capital effects, but innate AQ effects are significantly larger than discretionary AQ effects.

Suggested Citation

  • Francis, Jennifer & LaFond, Ryan & Olsson, Per & Schipper, Katherine, 2004. "The Market Pricing of Accruals Quality," SIFR Research Report Series 22, Institute for Financial Research.
  • Handle: RePEc:hhs:sifrwp:0022
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    Cited by:

    1. Shevlin, Terry, 2004. "Discussion of "A framework for the analysis of firm risk communication"," The International Journal of Accounting, Elsevier, vol. 39(3), pages 297-302.

    More about this item

    Keywords

    Expected return; Information uncertainty; Accounting quality;

    JEL classification:

    • D89 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Other
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • M49 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Other

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