The Accounting Review · 2001 · 1.2K citations · 21 references
BusinessAccountancyFinanceCorporate FinanceFinancial AccountingFinancial EconomicsAccrual AccountingAccrual AnalysisAbnormal AccrualsAbnormal Earnings ValuationAccrual MispricingAccruals PersistenceMarket Pricing EffectsNondiscretionary Accruals
This paper investigates whether stock prices rationally reflect the one‑year‑ahead earnings implications of Jones (1991) model‑estimated abnormal accruals. The study finds that stock prices overestimate the one‑year‑ahead earnings impact of abnormal accruals, leading to an overpricing of these accruals, a result that extends prior work, is driven largely by discretionary accruals, and remains robust across alternative accrual measures and after controlling for nondiscretionary accruals.
This paper examines the market pricing of Jones (1991) modelestimated 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.
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Common risk factors in the returns on stocks and bonds
Eugene F. Fama, Kenneth R. French · Journal of Financial Economics · 1993 · 27.7K citations
Earnings Management During Import Relief Investigations
Jennifer Jones · Journal of Accounting Research · 1991 · 8.6K citations
Business, Accountancy, Accounting +13