Understanding the Accrual Anomaly / Jin Ginger Wu, Lu Zhang, X. Frank Zhang.

Format:

Book

Author/Creator:

Wu, Jin Ginger.

Contributor:

National Bureau of Economic Research.

Zhang, Lu.

Zhang, X. Frank.

Series:

Working Paper Series (National Bureau of Economic Research) no. w13525.

NBER working paper series no. w13525

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2007.

Summary:

Interpreting accruals as working capital investment, we hypothesize that firms rationally adjust their investment to respond to discount rate changes. Consistent with the optimal investment hypothesis, we document that (i) the predictive power of accruals for future stock returns increases with the covariations of accruals with past and current stock returns, and (ii) adding investment- based factors into standard factor regressions substantially reduces the magnitude of the accrual anomaly. High accrual firms also have similar corporate governance and entrenchment indexes as low accrual firms. This evidence suggests that the accrual anomaly is more likely to be driven by optimal investment than by investor overreaction to excessive growth or over-investment.

Notes:

Print version record

October 2007.