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Accruals and the performance of stock returns following external financing activities

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  • Papanastasopoulos, Georgios
  • Thomakos, Dimitrios
  • Wang, Tao

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.

Suggested Citation

  • Papanastasopoulos, Georgios & Thomakos, Dimitrios & Wang, Tao, 2011. "Accruals and the performance of stock returns following external financing activities," The British Accounting Review, Elsevier, vol. 43(3), pages 214-229.
    • Handle: RePEc:eee:bracre:v:43:y:2011:i:3:p:214-229
    DOI: 10.1016/j.bar.2011.06.007
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    2. Artikis, Panagiotis G. & Papanastasopoulos, Georgios A., 2016. "Implications of the cash component of earnings for earnings persistence and stock returns," The British Accounting Review, Elsevier, vol. 48(2), pages 117-133.
    3. Nguyen Thi Hoa Hong & Nguyen Thai Anh & Nguyen Tran Viet Hoang & Do Nhat Minh, 2023. "Corporate governance, external financing, and earnings management: new evidence from an emerging market," Future Business Journal, Springer, vol. 9(1), pages 1-22, December.

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    More about this item

    Keywords

    External financing activities; Accruals; Stock returns;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • M4 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting

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