Three essays on Accrual Anomaly – International evidence
The literature on the Accrual Anomaly (AA) – a negative relationship between current accruals and future stock returns – has identified various factors as the determinants of its occurrence. However, these factors are primarily related to a firm’s financial reporting quality or the information processing ability of market participants, and findings on the occurrence of AA in a cross-country setting are also scant and contradictory. The research gaps necessitate further investigation into the factors that are not directly influenced by firms or market participants but have a direct bearing on accrual reporting, ultimately contributing to AA in a cross-country setting. This thesis addresses these research gaps by examining the effect of three different aspects on AA: Economic Policy Uncertainty (EPU), analyst forecast accuracy, and International Financial Reporting Standards (IFRS) adoption.
Specifically, Essay One examines the relationship between EPU, accrual persistence, and AA. First, the findings reveal variations in the occurrence of AA across 26 countries, with evidence of its presence in eight countries. This substantiates the existence of AA in major global economies. Most importantly, the results show that EPU accentuates AA, suggesting that EPU affects how investors interpret reported accruals, leading to misinterpretation and mispricing of accruals. Furthermore, this study finds that higher accrual quality, as measured by accrual persistence, mitigates AA ̶ a finding in line with the proposition that increased accrual persistence enhances investors’ ability to price accruals accurately. However, during periods of elevated EPU, the impact of accrual persistence on AA is not significant, implying that accrual persistence might be adversely affected during times of heightened uncertainty.
Essay Two investigates the role of analyst forecast accuracy in explaining AA and the impact of EPU and accruals quality on analyst forecast accuracy. The findings reveal that analysts’ inaccurate forecasts contribute to AA. This suggests that analysts’ inability to properly account for accruals into their forecasts can mislead investors’ interpretations and result in accruals mispricing. Moreover, this study finds that higher EPU increases the difficulty for analysts to predict future earnings and is positively associated with forecast errors. However, better accrual quality, measured by less extreme accruals and higher accrual persistence, improves analyst forecast accuracy. Notably, during periods of high EPU, analysts’ forecast errors further exacerbate AA. In all, the findings of this Essay highlight the intricate relationships among EPU, analysts’ forecast errors, and AA.
Essay Three investigates the impact of IFRS adoption on AA in G-20 countries. The results indicate that IFRS adoption accentuates AA in five countries, while it has no impact on the remaining G-20 countries. This suggests that the influence of IFRS adoption on AA is not uniform across the sample countries. Despite the perception of IFRS as a high-quality accounting standard, the anticipated information benefits in terms of reducing AA have not been evident in five of the sample countries. This disparity necessitates further investigation into the moderating effect of country-level governance factors on the association between IFRS implementation and AA. The investigation to this end reveals that governance is stronger in countries where IFRS has no impact compared to those where IFRS adoption is associated with an increase in AA. These findings suggest that the adoption of IFRS alone does not guarantee an improved information environment, and the benefits of IFRS adoption are contingent on the strength of country-level governance.
Overall, this thesis provides valuable insights into the AA phenomenon using cross-country data. The findings contribute to the existing literature by shedding light on the impact of EPU, accrual quality, analyst forecast accuracy, and IFRS adoption on AA.
