The pricing of accruals for profit and loss firms

Original Research

Abstract

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.

Keywords

Accrual mispricing Earnings Profits Losses 

JEL Classification

M41 

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Copyright information

© Springer Science+Business Media, LLC 2009

Authors and Affiliations

  • Nicholas Dopuch
    • 1
  • Chandra Seethamraju
    • 2
  • Weihong Xu
    • 3
  1. 1.Olin School of BusinessWashington University in St. LouisSt. LouisUSA
  2. 2.Mellon Capital ManagementSan FranciscoUSA
  3. 3.Department of Accounting and LawState University of New York at BuffaloBuffaloUSA

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