The pricing of accruals for profit and loss firms
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This paper investigates whether the accrual anomaly reported in prior studies exists across both profit and loss firms. We posit that the extent of accrual mispricing is less severe for loss firms than for profit firms because earnings for loss firms are less value relevant and, therefore, less subject to accrual mispricing. As expected, we find that the accrual overpricing anomaly is restricted to profit-making firms and, thus, is dampened by the inclusion of loss firms in the sample. Furthermore, we report that accrual overpricing for profit firms but not for loss firms is primarily attributable to the overpricing of positive accruals of profit firms compared with those of loss firms. Finally, we find that the phenomenon of accrual overpricing for profit but not for loss firms may persist into the new regulatory environment following the passage of the Sarbanes–Oxley Act of 2002.
KeywordsAccrual mispricing Earnings Profits Losses
We appreciate the helpful comments of Scott Whisenant and workshop participants at the University of Houston. We are particularly indebted to Professor Cheng F. Lee (editor) and the anonymous reviewers for their constructive suggestions. The views expressed in this paper are those of the authors and do not necessarily reflect those of Mellon Capital Management.
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