Abstract
Numerous accounting studies claim that investors fail to rationally price accrual-related information and that investors are functionally fixated. This study documents the importance of performing robustness tests when testing economic or behavioral explanations for apparent accounting-related security mispricing. We find that performing robustness tests that exclude a small number of firm-year observations (approximately 200 firm-year observations or about 1% of the entire sample) reveals an inverted U-shaped relation between buy-and-hold abnormal returns and total accruals. An inverted U-shaped relation is inconsistent with the functional fixation (earnings fixation) hypothesis. We conduct similar robustness tests for the abnormal accrual anomaly and the net operating assets anomaly proposed by other investigators, and also find an inverted U-shaped relation between buy-and-hold abnormal returns and abnormal accruals and net operating assets. These findings are inconsistent with the explanations put forth by those investigators. Such evidence leads us to conclude that the accrual-related anomalies are unlikely to be due to investors' inability to process accounting information, as suggested by the functional fixation hypotheses tested.
| Original language | English (US) |
|---|---|
| Pages (from-to) | 297-339 |
| Number of pages | 43 |
| Journal | Journal of Accounting Research |
| Volume | 44 |
| Issue number | 2 |
| DOIs | |
| State | Published - May 2006 |
| Externally published | Yes |
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ASJC Scopus subject areas
- Finance
- Accounting
- Economics and Econometrics
Cite this
An analysis of the theories and explanations offered for the mispricing of accruals and accrual components. / Kraft, Arthur; Leone, Andrew; Wasley, Charles.
In: Journal of Accounting Research, Vol. 44, No. 2, 05.2006, p. 297-339.Research output: Contribution to journal › Article
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TY - JOUR
T1 - An analysis of the theories and explanations offered for the mispricing of accruals and accrual components
AU - Kraft, Arthur
AU - Leone, Andrew
AU - Wasley, Charles
PY - 2006/5
Y1 - 2006/5
N2 - Numerous accounting studies claim that investors fail to rationally price accrual-related information and that investors are functionally fixated. This study documents the importance of performing robustness tests when testing economic or behavioral explanations for apparent accounting-related security mispricing. We find that performing robustness tests that exclude a small number of firm-year observations (approximately 200 firm-year observations or about 1% of the entire sample) reveals an inverted U-shaped relation between buy-and-hold abnormal returns and total accruals. An inverted U-shaped relation is inconsistent with the functional fixation (earnings fixation) hypothesis. We conduct similar robustness tests for the abnormal accrual anomaly and the net operating assets anomaly proposed by other investigators, and also find an inverted U-shaped relation between buy-and-hold abnormal returns and abnormal accruals and net operating assets. These findings are inconsistent with the explanations put forth by those investigators. Such evidence leads us to conclude that the accrual-related anomalies are unlikely to be due to investors' inability to process accounting information, as suggested by the functional fixation hypotheses tested.
AB - Numerous accounting studies claim that investors fail to rationally price accrual-related information and that investors are functionally fixated. This study documents the importance of performing robustness tests when testing economic or behavioral explanations for apparent accounting-related security mispricing. We find that performing robustness tests that exclude a small number of firm-year observations (approximately 200 firm-year observations or about 1% of the entire sample) reveals an inverted U-shaped relation between buy-and-hold abnormal returns and total accruals. An inverted U-shaped relation is inconsistent with the functional fixation (earnings fixation) hypothesis. We conduct similar robustness tests for the abnormal accrual anomaly and the net operating assets anomaly proposed by other investigators, and also find an inverted U-shaped relation between buy-and-hold abnormal returns and abnormal accruals and net operating assets. These findings are inconsistent with the explanations put forth by those investigators. Such evidence leads us to conclude that the accrual-related anomalies are unlikely to be due to investors' inability to process accounting information, as suggested by the functional fixation hypotheses tested.
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U2 - 10.1111/j.1475-679X.2006.00202.x
DO - 10.1111/j.1475-679X.2006.00202.x
M3 - Article
VL - 44
SP - 297
EP - 339
JO - Journal of Accounting Research
JF - Journal of Accounting Research
SN - 0021-8456
IS - 2
ER -