Journal Article

Accruals Quality, Stock Returns, and Macroeconomic Conditions

Qi, Yaxuan, Kim, Dongcheol

2010

Overview

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 very 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.

• Publisher: American Accounting Association
• Subject: Accruals / Business cycles / Capital costs / Cost of capital / Cross-sectional analysis / Earnings / Economic activity / Economic fluctuations / Equity capital / Financial portfolios / Financial reporting / Investment analysis / Investment risk / Macroeconomics / Portfolios / Predisposing factors / Pricing / Rates of return / Regression analysis / Risk / Risk factors / Risk management / Risk premiums / Statistical significance / Stock prices / Stock returns / Stocks / Studies / Yield