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The accrual anomaly in Europe: The role of accounting distortions

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  • Papanastasopoulos, Georgios A.
  • Tsiritakis, Emmanuel

Abstract

Numerous studies claim that the accrual anomaly in the U.S. stock market is due mostly to temporary accounting distortions arising from accrual accounting. We examine the validity of this explanation in an international setting. Across the 15 developed European equity markets we examine, accounting distortions contribute to the negative relation between accruals and future earnings performance in 14 equity markets. Further, we show that the negative relation between accruals and stock returns could be at least attributable to accounting distortions. In particular, accruals related to accounting distortions predict returns in 7 out of the 9 markets where the accrual anomaly occurs in Europe. Finally, we show that the impact of accounting distortions on the pricing of the accrual component of earnings is stronger in markets with a higher level of trust and a lower level of secrecy.

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  • Papanastasopoulos, Georgios A. & Tsiritakis, Emmanuel, 2015. "The accrual anomaly in Europe: The role of accounting distortions," International Review of Financial Analysis, Elsevier, vol. 41(C), pages 176-185.
    • Handle: RePEc:eee:finana:v:41:y:2015:i:c:p:176-185
    DOI: 10.1016/j.irfa.2015.06.006
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    More about this item

    Keywords

    Accounting accruals; Accounting distortions; Accrual anomaly; International stock markets; Trust;
    All these keywords.

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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