Intangible returns, accruals, and return reversal : a multi-period examination of the accrual anomaly
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This dissertation reexamines the theoretical and empirical relation between future period returns and current period accruals. Prior studies find a negative relation between current period accruals and future returns. This finding (the accrual anomaly) is often attributed to either (a) investors mispricing accrual persistence or (b) investors mispricing the growth information contained in current accruals. In this study, I show that accruals are a natural manifestation of firm growth and contraction and that the information contained in accruals is not associated with future returns. This finding holds for multiple accrual definitions and decompositions. My study provides an alternative explanation for the accrual anomaly. In addition, I provide economic intuition and empirical evidence suggesting that the accrual anomaly is a function of the value/growth anomaly. In contrast to prior studies which use a two-period model to show the negative association between accruals in period one and returns in period two, I employ a three period log-linear model decomposed from a firm’s book-to-market ratio and show that investors do not misprice the information contained in accruals. My study shows that in the four year period prior to accrual recognition, equity prices tend to be driven disproportionately by intangible returns, or returns not explained by accounting measures. Accordingly, the relation between prior-period intangible returns and future-period returns may subsume the relation between current-period accruals and future returns. Empirical tests support this explanation.