Accruals Quality, Stock Returns, and Macroeconomic Conditions

52 Pages Posted: 14 May 2008 Last revised: 10 Dec 2014

See all articles by Dongcheol Kim

Dongcheol Kim

Korea University Business School

Yaxuan Qi

City University of Hong Kong (CityU) - Department of Economics & Finance

Date Written: September 2009

Abstract

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 vary 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.

Keywords: Accruals quality, Low-priced stocks, Risk factor models, Macroeconomic conditions, Business cycle

JEL Classification: G12, G14, M41

Suggested Citation

Kim, Dongcheol and Qi, Yaxuan, Accruals Quality, Stock Returns, and Macroeconomic Conditions (September 2009). Accounting Review, Vol. 85, No. 3, Available at SSRN: https://ssrn.com/abstract=1132821 or http://dx.doi.org/10.2139/ssrn.1132821

Dongcheol Kim

Korea University Business School ( email )

Anam-Dong, Seongbuk-Gu
Seoul 136-701, 136701
Korea
+82-2-3290-2606 (Phone)

Yaxuan Qi (Contact Author)

City University of Hong Kong (CityU) - Department of Economics & Finance ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

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