Working Paper: NBER ID: w13525
Authors: Jin Ginger Wu; Lu Zhang; X Frank Zhang
Abstract: Interpreting accruals as working capital investment, we hypothesize that firms rationally adjust their investment to respond to discount rate changes. Consistent with the optimal investment hypothesis, we document that (i) the predictive power of accruals for future stock returns increases with the covariations of accruals with past and current stock returns, and (ii) adding investment- based factors into standard factor regressions substantially reduces the magnitude of the accrual anomaly. High accrual firms also have similar corporate governance and entrenchment indexes as low accrual firms. This evidence suggests that the accrual anomaly is more likely to be driven by optimal investment than by investor overreaction to excessive growth or over-investment.
Keywords: Accruals; Investment; Discount Rate; Stock Returns
JEL Codes: G12; G14; G31; G34; M41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| lower discount rates (E43) | increased investment (E22) |
| increased investment (E22) | higher accruals (M41) |
| lower discount rates (E43) | higher accruals (M41) |
| higher accruals (M41) | positively related to current stock returns (G12) |
| lower discount rates (E43) | negatively related to future returns (G12) |
| investment adjustments (G31) | stock returns (G12) |
| accrual anomaly (G14) | rational investment behavior (G11) |