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High Accruals Momentum Explained

Last Updated on 10 February, 2024 by Rejaul Karim

The forthcoming paper, titled “High Accruals Momentum,” by Xiaoting Hao, Juwon Jang, and Eunju Lee, investigates the information content of high accruals momentum, defined as a series of high discretionary accruals over four consecutive years.

The study discovers that firms consistently reporting high levels of discretionary accruals tend to experience low subsequent returns. This finding remains robust even after controlling for annual levels of discretionary accruals during the estimation period.

Moreover, the research uncovers a strong persistence in the predictive power of high accruals momentum for future returns, even as the existing accruals anomaly vanishes. The study also demonstrates that the high accruals momentum effect is more noticeable for low-growth firms, implying that the overpricing of stocks with high accruals momentum may be attributed to the managerial discretion to manage earnings.

Abstract Of Paper

We examine the information content of high accruals momentum defined as a string of high discretionary accruals for four consecutive years. We find that firms that consistently report high levels of discretionary accruals experience low subsequent returns. The results are robust after we control for annual levels of discretionary accruals for the estimation period of high accruals momentum. Furthermore, the predictive power of the high accruals momentum for future returns is strongly persistent even after the existing accruals anomaly disappears. Our results also show that the high accruals momentum impact is more pronounced for low growth firms, suggesting that the overpricing of stocks with high accruals momentum is driven by managerial discretion to manage earnings.

Original paper – Download PDF

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Author

Xiaoting Hao
University of Wisconsin – Milwaukee – Sheldon B. Lubar School of Business

Juwon Jang
Texas A&M University

Eunju Lee
University of Massachusetts Lowell

Conclusion

In conclusion, the research paper “High Accruals Momentum” by Xiaoting Hao, Juwon Jang, and Eunju Lee provides significant insights into the information content of high accruals momentum, characterized by consistently high discretionary accruals over a four-year period.

The study reveals that firms with persistently high levels of discretionary accruals face low subsequent returns, with this finding remaining intact after controlling for annual levels of such accruals. Additionally, the research demonstrates a powerful and enduring predictive capability of high accruals momentum for future returns, even as existing accrual anomalies dissipate.

Importantly, the high accruals momentum impact is more prominent for low-growth firms, indicating that the overpricing of stocks with this momentum characteristic may arise from managerial discretion in earnings management. These findings contribute valuable knowledge to the understanding of accruals momentum and its implications for future stock returns.

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FAQ

Q1: What are the key findings regarding firms with high accruals momentum?

The study finds that firms exhibiting high accruals momentum, characterized by consistently high discretionary accruals over four years, tend to experience low subsequent returns. This result holds even after controlling for annual levels of discretionary accruals during the estimation period.

Q2: Is the predictive power of high accruals momentum persistent over time?

Yes, the research reveals a strong and persistent predictive power of high accruals momentum for future returns. This predictive capability remains robust even as the existing accruals anomaly in the market disappears.

Q3: How does the impact of high accruals momentum vary with firm characteristics?

The study indicates that the impact of high accruals momentum is more pronounced for low-growth firms. This suggests that the overpricing of stocks with high accruals momentum may be attributed to managerial discretion in managing earnings, particularly in the context of low-growth firms.

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