Inter-Temporal Persistence and Mispricing of Accruals and Growth in Long-Term Net Operating Assets: Growth or Accounting Distortions?
43 Pages Posted: 2 Apr 2007 Last revised: 13 May 2008
Date Written: March 2007
Abstract
This paper investigates two competing arguments for the lower persistence of accruals in an inter-temporal setting and their implications for accrual anomaly. The accounting distortions argument predicts a lower persistence of both accruals and growth in long-term net operating assets during periods of expansion than during recession. If investors fixate on earnings, then it predicts more mispricing of both accruals and growth in long-term net operating assets during expansionary periods relative to recessionary periods. In contrast, the growth argument predicts a lower persistence of accruals, but a higher persistence of growth in long-term net operating assets during expansions than during recessions. If investors are unable to access the effect of growth on future profitability, it predicts more (less) accrual (growth in long-term net operating assets) mispricing. Using a U.S. sample from 1972 to 2003, I find evidence consistent with the growth argument that during periods of expansion, the persistence of accruals is lower, but the persistence of growth in long-term net operating assets is higher. Additionally I find that the accrual mispricing is more pronounced, but the mispricing of growth in long-term net operating assets is less pronounced during periods of expansion.
Keywords: accrual persistence, accrual anomaly, dimishing marginal returns on new investments
JEL Classification: G14
Suggested Citation: Suggested Citation
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