Do accounting information and market environment matter for cross‐asset predictability?

This paper examines whether the differences in accounting information between stocks affect cross‐asset return predictability. We use a comprehensive set of accounting variables and find that abnormal accruals, earnings smoothness, book‐to‐market, firm age, leverage, abnormal capital investment and investment growth, among others, explain the variation in return predictability across pairing stocks. Moreover, our results show that cross‐asset predictability varies over time and is associated with funding liquidity and market sentiment. A simple trading strategy based on our findings yields a higher mean return, lower standard deviation and higher Sharpe ratio compared to a buy‐and‐hold strategy.