Book-to-Market Decomposition and the Accrual Anomaly

42 Pages Posted: 30 Dec 2010

See all articles by Yunhao Chen

Yunhao Chen

Florida International University (FIU) - School of Accounting

Xiaoquan Jiang

Florida International University (FIU) - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: December 22, 2010

Abstract

We decompose book-to-market (BP) ratio into book-to-intrinsic value (BV) ratio and intrinsic value-to-market (VP) ratio to shed further light on the debate of whether accruals and accrual anomaly are associated more with the risk/growth component (BV) or with the mispricing component (VP). Using both portfolio and regression approaches, we provide evidence that the accruals are mainly driven by the risk/growth component. We also find that BV and VP can at least partially explain the accrual anomaly and the explaining power is mainly attributable to the risk/growth component. Our results also confirm the advantage of BP decomposition. The explaining power of the accrual-return relation is significantly enhanced using both the BV and the VP components compared to using BP alone. Overall, our evidence supports the risk/growth argument in prior literature (e.g. Zhang 2007 and Wu et al. 2010). In addition, our results complement Resutek (2010) who finds that accrual anomaly is mainly driven by intangible returns rather than tangible returns. Additional validation analysis shows that our BV measure indeed reflects firm risk and growth characteristics.

Keywords: book-to-market decomposition, accrual anomaly, risk/growth, mispricing

JEL Classification: G12, G14, M41

Suggested Citation

Chen, Yunhao and Jiang, Xiaoquan, Book-to-Market Decomposition and the Accrual Anomaly (December 22, 2010). CAAA Annual Conference 2011, Available at SSRN: https://ssrn.com/abstract=1732380 or http://dx.doi.org/10.2139/ssrn.1732380

Yunhao Chen (Contact Author)

Florida International University (FIU) - School of Accounting ( email )

University Park
11200 SW 8th Street
Miami, FL 33199
United States

Xiaoquan Jiang

Florida International University (FIU) - Department of Finance ( email )

University Park
11200 SW 8th Street
Miami, FL 33199
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
199
Abstract Views
2,111
Rank
116,153
PlumX Metrics