(), Ryan LaFond
, Per Olsson
and Katherine Schipper
Jennifer Francis: Fuqua School of Business, Duke University, Postal: Durham, NC 27708, USA
Ryan LaFond: University of Wisconsin
Per Olsson: Duke University
Katherine Schipper: Financial Accounting Standards Board
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.
43 pages, March 15, 2004
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