Journal Article

The market pricing of accruals quality

Journal of Accounting and Economics 39(2): 295–327
Jennifer Francis, Ryan LaFond, Per Olsson, Katherine Schipper (2005)
Subject(s): Finance, accounting and corporate governance
Keyword(s): Capital markets, accruals quality, information risk
JEL Code(s): D80, G12, G14, M41, M43

We investigate whether investors price accruals quality, our proxy for the information risk associated with earnings. Measuring accruals quality (AQ) as the standard deviation of residuals from regressions relating current accruals to cash flows, we find that poorer AQ is associated with larger costs of debt and equity. This result is consistent across several alternative specifications of the AQ metric. We also distinguish between accruals quality driven by economic fundamentals (innate AQ) versus management choices (discretionary AQ). Both components have significant cost of capital effects, but innate AQ effects are significantly larger than discretionary AQ effects.

With permission of Elsevier

Volume 39
Issue 2
Pages 295–327