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Aggregate accruals and market returns: The role of aggregate M&A activity

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  • Heater, John C.
  • Nallareddy, Suresh
  • Venkatachalam, Mohan

Abstract

Extant literature documents that aggregate accruals positively predict future market returns and attributes this relation to either changes in discount rates or systematic earnings management. We offer an alternative explanation: aggregate merger and acquisition (M&A) activity drives this relation. M&A activity affects the magnitude of accruals, which in turn drives the market return predictability of aggregate accruals. We find that the ability of both aggregate accruals and discretionary aggregate accruals (a measure of systematic earnings management) to predict market returns disappears after controlling for aggregate M&A activity. Furthermore, aggregate M&A activity predicts future market returns, consistent with a price response to improvements in macroeconomic outcomes due to aggregate M&A activity.

Suggested Citation

  • Heater, John C. & Nallareddy, Suresh & Venkatachalam, Mohan, 2021. "Aggregate accruals and market returns: The role of aggregate M&A activity," Journal of Accounting and Economics, Elsevier, vol. 72(2).
    • Handle: RePEc:eee:jaecon:v:72:y:2021:i:2:s0165410121000471
    DOI: 10.1016/j.jacceco.2021.101432
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