The pricing of accruals for profit and loss firms |
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Authors: | Nicholas Dopuch Chandra Seethamraju Weihong Xu |
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Institution: | (1) Olin School of Business, Washington University in St. Louis, St. Louis, MO 63130, USA;(2) Mellon Capital Management, 595 Market Street, Suite 3000, San Francisco, CA 94105, USA;(3) Department of Accounting and Law, State University of New York at Buffalo, Buffalo, NY 14260, USA |
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Abstract: | This paper investigates whether the accrual anomaly reported in prior studies exists across both profit and loss firms. We
posit that the extent of accrual mispricing is less severe for loss firms than for profit firms because earnings for loss
firms are less value relevant and, therefore, less subject to accrual mispricing. As expected, we find that the accrual overpricing
anomaly is restricted to profit-making firms and, thus, is dampened by the inclusion of loss firms in the sample. Furthermore,
we report that accrual overpricing for profit firms but not for loss firms is primarily attributable to the overpricing of
positive accruals of profit firms compared with those of loss firms. Finally, we find that the phenomenon of accrual overpricing
for profit but not for loss firms may persist into the new regulatory environment following the passage of the Sarbanes–Oxley
Act of 2002. |
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