Accruals quality, stock returns, and macroeconomic conditions

Research output: Journal Publications and ReviewsRGC 21 - Publication in refereed journalpeer-review

112 Scopus Citations
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Author(s)

Detail(s)

Original languageEnglish
Pages (from-to)937-978
Journal / PublicationAccounting Review
Volume85
Issue number3
Publication statusPublished - May 2010
Externally publishedYes

Abstract

This study examines whether and how earnings quality, measured as accruals quality (AQ), affects the cost of equity capital. Using two-stage cross-sectional regression tests, we find that the AQ risk factor is significantly priced, after controlling for low-priced stocks. This result is robust in tests using individual stocks, various portfolio formations, and different beta estimations. Furthermore, we show that AQ and its pricing effect systematically vary with business cycles and macroeconomic variables. In particular, this pricing effect is prominent in total AQ and innate AQ but not in discretionary AQ. The risk premium associated with AQ exists only in economic expansion but not in recession periods. Poorer AQ firms are more vulnerable to macroeconomic shocks. The risk premium and the dispersion of AQ are also related to future economic activity. Overall, our results suggest that AQ contributes to the cost of equity capital and that its pricing effect is associated with fundamental risk.

Research Area(s)

  • Accruals quality, Cross-sectional regression tests, Low-priced returns, Macroeconomic conditions, Risk factor models

Citation Format(s)

Accruals quality, stock returns, and macroeconomic conditions. / Kim, Dongcheol; Qi, Yaxuan.
In: Accounting Review, Vol. 85, No. 3, 05.2010, p. 937-978.

Research output: Journal Publications and ReviewsRGC 21 - Publication in refereed journalpeer-review