Accrual mispricing, value-at-risk, and expected stock returns

Simlai, Prodosh

doi:10.1007/s11156-021-00985-2

Cited by 10 publications

(2 citation statements)

References 87 publications

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“…Using Fama and MacBeth (1973) cross‐section regression approach, we regress pandemic returns on past, accrued risk (i.e., betas) and a list of control variables found in literature. The composition of our regressions is inspired by prior studies (see e.g., Hou & Loh, 2016; Simlai, 2021). Specifically, we include momentum (MOM) computed as cumulative monthly returns over 2‐month‐lagged 12‐month period (January 2019 to December 2019).…”

Section: Methodsmentioning

confidence: 99%

How do investors price accrual risk during crises?

Alhenawi

Hassan

2022

Int. J Fin Econ

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Under rational asset pricing theory, and in efficient, frictionless market, risk should be priced contemporaneously and, thus, the market meltdown during the COVID‐19 pandemic must have been a contingent valuation of newly created risk. In contrast, we find that the reduction in equity value during the pandemic was stronger for stocks with higher pre‐pandemic accrued risk. This lends support to the discrete pricing proposition, which is a form of behavioural bias where investors price accrued risk during significant corporate or macroeconomic events. Furthermore, we compare the pricing of accrued risk during the pandemic with the pricing of accrued risk during non‐pandemic events and during past financial crises. We report evidence that pricing of accrued risk results in a premium in normal times and a discount during financial turmoil. Finally, we report evidence that investors price accrued stocks discriminately, that is, they are more likely to price accrued risk of stocks of larger firms, smaller B/M, and weaker momentum. Several theoretical and practical implications are discussed inside the paper.

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Section: Methodsmentioning

confidence: 99%

How do investors price accrual risk during crises?

Alhenawi

Hassan

2022

Int. J Fin Econ

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“…Prior literature shows that stock markets overprice total and/or discretionary accrual component of earnings (see, for example, Sloan 1996;Teoh et al 1998a, b;Xie 2001;Desai et al 2004;Iqbal et al 2009;Iqbal and Strong 2010;Wu et al 2010;Simlai 2021). Similarly, accruals, especially the discretionary component over which managers have the discretion to manipulate, are widely used as a proxy for earnings management.…”

Section: Introductionmentioning

confidence: 99%

The context of earnings management and its ability to predict future stock returns

Nguyen

Iqbal

Shiwakoti

2022

Rev Quant Finan Acc

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This paper constructs a signal-based composite index, namely ESCORE, which captures the context of earnings management. Specifically, ESCORE aggregates 15 individual signals related to both accrual and real earnings management based on prior relevant literature. After establishing that ESCORE is capable of capturing the context in which earnings management is more likely to occur, the study finds that low ESCORE firms outperform those with high ESCORE by an average of 1.37% per month after controlling for risk loadings on the market, size, book-to-market and momentum factors up to one year after portfolio formation in the UK. This finding implies that investors tend to ignore the observable context of earnings management. In addition, with ESCORE model, investors do not need to estimate the magnitude of earnings management, rather it is sufficient to look at the surrounding context to differentiate between low and high earnings management firms. Finally, when tested using the US data, most of the main results of the study appear to hold.

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Role of Comprehensive Income in Predicting Bankruptcy

Rahmi

Liang

et al. 2022

Comput Econ

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Accrual mispricing, value-at-risk, and expected stock returns

Cited by 10 publications

References 87 publications

How do investors price accrual risk during crises?

How do investors price accrual risk during crises?

The context of earnings management and its ability to predict future stock returns

Role of Comprehensive Income in Predicting Bankruptcy

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