Explaining the Accruals Anomaly: Evidence from Insider Trades

35 Pages Posted: 19 Feb 2009

See all articles by Julia Sawicki

Julia Sawicki

Instituto Superior de Economia e Gestão

Keshab Shrestha

Nanyang Business School, Nanyang Technological University

Date Written: February 19, 2009

Abstract

We examine competing explanations of the accruals anomaly, fixation and agency, using insider trading patterns and valuation measures. Quadratic regressions which control for confounding effects confirm an asymmetric relationship between trades and accruals concentrated on the selling side, supporting an overvalued equity agency explanation. Further evidence is provided by tests using valuation. The relationship between accruals and trading is only significant within the low book-to-market (BM) firms. There is also evidence that high BM firms manage their earnings upward compared to low BM firms. Tests using a subset of firms sorted on valuation ratios and past growth also support the agency explanation with evidence of a strong relationship between sales and accruals for the glamor firms while buying and accruals are not related for the value firms.

Keywords: Accruals anomaly, Earnings management, Insider trading, Mispricing, Asymmetry, Value-Glamour, Overvalued equity

JEL Classification: G14, G30, M41, M43, D82

Suggested Citation

Sawicki, Julia and Shrestha, Keshab, Explaining the Accruals Anomaly: Evidence from Insider Trades (February 19, 2009). Available at SSRN: https://ssrn.com/abstract=1346324 or http://dx.doi.org/10.2139/ssrn.1346324

Julia Sawicki (Contact Author)

Instituto Superior de Economia e Gestão ( email )

Universidade Técnica de Lisboa
Lisbon, 1249-078
Portugal
351.309.767.142 (Phone)

Keshab Shrestha

Nanyang Business School, Nanyang Technological University ( email )

Singapore, 639798
Singapore

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