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Accruals and future performance: can it be attributed to risk?


Momente', Francesco; Reggiani, Francesco; Richardson, Scott (2015). Accruals and future performance: can it be attributed to risk? Review of Accounting Studies, 20(4):1297-1333.

Abstract

We decompose broad-based measures of accruals into firm-specific and related-firm components. We find that the negative relation between accruals and future firm performance is almost entirely attributable to the firm-specific component. Standard risk-based explanations are hard to reconcile with this fact. To the extent expected returns have a common component spanning related firms, a risk-based explanation would suggest a stronger negative relation between accruals and future firm performance when related firms are also growing. Instead, the attenuation we document is more likely attributable to suboptimal investment decisions, which the stock market and analysts do not incorporate in a timely manner.

Abstract

We decompose broad-based measures of accruals into firm-specific and related-firm components. We find that the negative relation between accruals and future firm performance is almost entirely attributable to the firm-specific component. Standard risk-based explanations are hard to reconcile with this fact. To the extent expected returns have a common component spanning related firms, a risk-based explanation would suggest a stronger negative relation between accruals and future firm performance when related firms are also growing. Instead, the attenuation we document is more likely attributable to suboptimal investment decisions, which the stock market and analysts do not incorporate in a timely manner.

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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Business Administration
Dewey Decimal Classification:330 Economics
Scopus Subject Areas:Social Sciences & Humanities > Accounting
Social Sciences & Humanities > General Business, Management and Accounting
Scope:Discipline-based scholarship (basic research)
Language:English
Date:2015
Deposited On:05 Aug 2016 09:04
Last Modified:15 May 2024 01:46
Publisher:Springer
ISSN:1380-6653
Additional Information:The final publication is available at Springer via http://dx.doi.org/10.1007/s11142-015-9319-x
OA Status:Green
Publisher DOI:https://doi.org/10.1007/s11142-015-9319-x
Other Identification Number:merlin-id:13542
  • Content: Accepted Version