| Affiliation: | 1.School of Accounting and Finance,University of Waterloo,Waterloo,Canada;2.Department of Accounting and Taxation, Peter J. Tobin College of Business,St. John’s University,New York,USA;3.Department of Statistics and Actuarial Science, School of Accounting and Finance,University of Waterloo,Waterloo,Canada |
| Abstract: | Using a battery of look-ahead-bias free measures of accruals quality (AQ), we find a strong and long-lasting negative relation between future returns and AQ. In decile portfolios that rank on AQ, a hedge portfolio that goes long in the lowest decile and short in the highest decile generates an annualized, risk-adjusted return of 4–12 % over 1-month to 5-year horizons, depending on the AQ measure and the portfolio weighting scheme. The return premiums associated with AQ are, (1) robust to a wide range of AQ measures, (2) robust to a battery of return-informative variables, and (3) not driven by low-priced or small stocks, earnings shocks, or the fourth-quarter effect. The documented premiums are consistent with the information uncertainty effect where firm uncertainty is negatively related to future returns. |
