Stock performance and the mispricing of accruals
Abstract I investigate the relationship between contemporaneous stock price performance and the persistence of accrued earnings, and its impact on the accrual anomaly. I find that, in a fiscal year, accrued earnings for stocks that have performed poorly are less persistent in predicting future earnings than accrued earnings for stocks that have performed moderately. I further find that a hedge strategy based on accruals earns greater abnormal returns following bad news years. The results are consistent with conservative accounting causing accrued earnings to be even less persistent in bad news years and investors failing to efficiently price this differential in persistence.