The Pricing of Accruals Quality: January vs. the Rest of the Year

Abstract

As an alternative way to shed light on the debate over whether the modified Dechow and Dichev (2002) AQ measure is a priced risk factor, we examine the effect of seasonality on the pricing of AQ. We find that (1) high AQ stocks outperform low AQ stocks only in January; (2) during the rest of the calendar year, high AQ firms underperform low AQ firms; (3) about half of the January AQ effect occurs during the first 5 trading days of January; (4) a January AQ premium is observed in almost every year of our sample period; and (5) the January AQ effect is driven, at least partly, by the stock price effects of tax loss selling around the turn of the year. Taken together, these findings suggest that any higher returns to AQ are due to mispricing and not systematic information risk. Examining the calendar-year behavior of AQ’s pricing also helps reconcile the conflicting prior evidence on whether high AQ firms earn higher future returns, a necessary (but not sufficient) condition for AQ to be a priced risk factor.

Keywords: accruals quality, information risk, January effect, seasonality, asset pricing

JEL Classification: G10, G12, G14, M40, M41