Accounting Anomalies, Risk and Return

47 Pages Posted: 29 Sep 2011 Last revised: 15 Mar 2012

See all articles by Stephen H. Penman

Stephen H. Penman

Columbia University - Columbia Business School, Accounting, Business Law & Taxation

Julie Lei Zhu

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF)

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Date Written: August 1, 2011

Abstract

Abstract. This paper investigates the question of whether so-called anomalous returns predicted by accounting numbers are normal returns for risk or abnormal returns. It does so via a model that shows how accounting numbers inform about normal returns if pricing were rational. The model equates expected returns to expectations of earnings and earnings growth, so that any variable that forecasts earnings and earnings growth also forecasts required returns if the market prices those outcomes as risky. The empirical results indicate that many accounting anomaly variables forecast forward earnings and growth, and in the same direction in which they forecast returns. These variables include accruals, asset growth, profitability, investment, net share issuance, and external financing. In short, the observed “anomalous” returns associated with these accounting numbers are consistent with the rational pricing.

Suggested Citation

Penman, Stephen H. and Zhu, Lei, Accounting Anomalies, Risk and Return (August 1, 2011). Available at SSRN: https://ssrn.com/abstract=1934365 or http://dx.doi.org/10.2139/ssrn.1934365

Stephen H. Penman (Contact Author)

Columbia University - Columbia Business School, Accounting, Business Law & Taxation ( email )

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Lei Zhu

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF)

Shanghai Jiao Tong University
211 West Huaihai Road
Shanghai, 200030
China

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