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The Accrual Anomaly: Accrual Originations, Accrual Reversals, and Resolution of Uncertainty

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  • Tatiana Fedyk
  • Zvi Singer
  • Theodore Sougiannis

Abstract

We combine a fundamental property of accruals and a behavioral phenomenon to provide an explanation for the accrual anomaly. The fundamental property is accruals that originate must subsequently reverse. The behavioral phenomenon is individuals tend to underestimate the variance of noisy signals in various domains of decision making. We argue that originating accruals represents a noisier signal than reversing accruals because the uncertainty of whether originating accruals will eventually convert into cash is high, while there is no uncertainty regarding reversing accruals. If investors underestimate the variance of originating accruals but understand reversing accruals, then originating accruals will be mispriced while reversing accruals will not. To test this prediction, we first develop and empirically validate a novel method for ex ante detecting accrual originations and their reversals. Then we document that investors face increased uncertainty when accruals originate and decreased uncertainty when accruals reverse, and we provide evidence that only originating accruals are mispriced. We further demonstrate that our findings can be useful for improving the accrual‐based trading strategy by ex ante detecting and removing accrual reversals from extreme accrual portfolios. Overall, we provide a behavioral explanation for the accrual anomaly that is consistent with the mispricing of originating accruals only. L'anomalie des ajustements comptables : ajustements initiaux, contre‐passation et résolution de l'incertitude Nous combinons une propriété fondamentale des ajustements comptables et un phénomène comportemental afin de proposer une explication de l'anomalie des ajustements comptables. La propriété fondamentale est la suivante: les ajustements comptables qui sont enregistrés doivent éventuellement faire l'objet de contre‐passations. Le phénomène comportemental est le suivant: les personnes ont tendance à sous‐estimer la fluctuation des signaux entachés de bruit dans divers aspects du processus décisionnel. Nous soutenons que les ajustements comptables constituent davantage un signal entaché de bruit au moment de leur enregistrement que lors de leur contre‐passation, étant donné qu'il y a un fort degré d'incertitude concernant la conversion éventuelle des ajustements initiaux en liquidités, mais qu'aucune incertitude ne touche leur contre‐passation. Si les investisseurs sous‐estiment la fluctuation des ajustements comptables initiaux mais comprennent qu'ils seront contre‐passés, ils auront tendance à mal évaluer les ajustements au moment de leur enregistrement mais pas de leur contre‐passation. Pour vérifier cette prédiction, nous commençons par élaborer et valider empiriquement un nouveau modèle permettant de détecter ex ante l'enregistrement et la contre‐passation des ajustements comptables. Nous montrons que les investisseurs font face à une incertitude accrue lors de l'enregistrement des ajustements comptables et à une incertitude moindre lors de leur contre‐passation, et nous fournissons des éléments probants indiquant que seuls les ajustements initiaux sont mal évalués. Nous démontrons également que nos résultats peuvent être utiles pour améliorer la stratégie boursière fondée sur la comptabilité d'exercice grâce à la détection et à l'élimination préalable des contre‐passations dans les portefeuilles constitués d'actions de sociétés présentant des ajustements comptables extrêmes. De façon générale, nous fournissons une explication comportementale à l'anomalie des ajustements comptables où seuls les ajustements initiaux sont sous‐évalués.

Suggested Citation

  • Tatiana Fedyk & Zvi Singer & Theodore Sougiannis, 2020. "The Accrual Anomaly: Accrual Originations, Accrual Reversals, and Resolution of Uncertainty," Contemporary Accounting Research, John Wiley & Sons, vol. 37(2), pages 885-916, June.
  • Handle: RePEc:wly:coacre:v:37:y:2020:i:2:p:885-916
    DOI: 10.1111/1911-3846.12538
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