The Mispricing of Abnormal Accruals

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

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Author(s)

  • Hong Xie

Detail(s)

Original languageEnglish
Pages (from-to)357-373
Journal / PublicationAccounting Review
Volume76
Issue number3
Publication statusPublished - Jul 2001
Externally publishedYes

Abstract

This paper examines the market pricing of Jones (1991) model-estimated abnormal accruals (often termed "discretionary accruals" in the prior literature) to test whether stock prices rationally reflect the one-year-ahead earnings implications of these accruals. Using the Mishkin (1983) and hedge-portfolio test methods Sloan (1996) employs, I find that the market overestimates the persistence, or one-year-ahead earnings implications, of abnormal accruals, and consequently overprices these accruals. These results extend Subramanyam (1996) by demonstrating that the market not only prices, but also overprices abnormal accruals. They also suggest that the overpricing of total accruals that Sloan (1996) documents is due largely to abnormal accruals. The results are robust to five alternative measures of abnormal accruals, and still hold when I estimate abnormal accruals after controlling for major unusual but largely nondiscretionary accruals. The latter finding is consistent with the notion that the market overprices the portion of abnormal accruals stemming from managerial discretion.

Research Area(s)

  • Abnormal accruals, Accruals, Discretionary accruals, Mispricing

Citation Format(s)

The Mispricing of Abnormal Accruals. / Xie, Hong.
In: Accounting Review, Vol. 76, No. 3, 07.2001, p. 357-373.

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