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Understanding the Accrual Anomaly

Author: Jin Ginger Wu; Lu Zhang; X Frank Zhang
Publisher: Cambridge, Mass. National Bureau of Economic Research 2007.
Series: Working paper series (National Bureau of Economic Research), no. w13525.
Edition/Format:   eBook : Document : EnglishView all editions and formats
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  Read more...
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Details

Genre/Form: Electronic book
Material Type: Document, Internet resource
Document Type: Internet Resource, Computer File
All Authors / Contributors: Jin Ginger Wu; Lu Zhang; X Frank Zhang
OCLC Number: 1027338096
Notes: October 2007.
Description: 1 online resource.
Details: Mode of access: World Wide Web.
Series Title: Working paper series (National Bureau of Economic Research), no. w13525.
Responsibility: Jin Ginger Wu, Lu Zhang, X. Frank Zhang.

Abstract:

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.

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