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Accruals and the Performance of Stock Returns following External Financing Activities

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Accruals and the Performance of Stock Returns following External Financing Activities

Georgios Papanastasopoulos, Dimitrios D. Thomakos & Tao Wang

The British Accounting Review
Volume 43, Issue 3, September 2011, Pages 214-229


Abstract. This paper investigates the relation of the external financing anomaly with the accrual anomaly, by focusing separately on working capital accruals and long-term accruals. We find that external financing and accrual hedge portfolios not only generate superior returns, but they also constitute statistical arbitrage opportunities. Portfolio-level analysis and firm-level cross-sectional regressions show that the ability of external financing measures in predicting future returns remains strong, after controlling for working capital accruals. However, this ability is substantially reduced after controlling for long-term accruals. Our results appear to be consistent with investors’ failure to recognise agency-related overinvestment and/or opportunistic earnings management.

Keywords. External financing activities, Accruals, Stock returns

DOI. 10.1016/j.bar.2011.06.007


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