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Institute for Financial Research SIFR Research Report Series, Institute for Financial Research

No 22:
The Market Pricing of Accruals Quality

Jennifer Francis (), Ryan LaFond, Per Olsson and Katherine Schipper

Abstract: We investigate whether investors price accruals quality, our proxy for the information risk associated with earnings. Measuring accruals quality (AQ) as the standard deviation of residuals from regressions relating current accruals to cash flows, we find that poorer AQ is associated with larger costs of debt and equity. This result is consistent across several alternative specifications of the AQ metric. We also distinguish between accruals quality driven by economic fundamentals ('innate AQ') versus management choices ('discretionary AQ'). Both components have significant cost of capital effects, but innate AQ effects are significantly larger than discretionary AQ effects.

Keywords: Expected return; Information uncertainty; Accounting quality; (follow links to similar papers)

JEL-Codes: D89; G12; M49; (follow links to similar papers)

43 pages, March 15, 2004

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