Is Accruals Quality a Priced Risk Factor?

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Accounting Papers
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asset-pricing tests
accruals quality
information risk
portfolio theory and diversification
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Core, John E
Guay, Wayne R
Verdi, Rodrigo S
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In a recent and influential empirical paper, Francis, LaFond, Olsson, and Schipper (FLOS) [2005. The market pricing of accruals quality. Journal of Accounting and Economics 39, 295–327] conclude that accruals quality (AQ) is a priced risk factor. We explain that FLOS’ regressions examining a contemporaneous relation between excess returns and factor returns do not test the hypothesis that AQ is a priced risk factor. We conduct appropriate asset-pricing tests for determining whether a potential risk factor explains expected returns, and find no evidence that AQ is a priced risk factor.

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2008-09-01
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Journal of Accounting and Economics
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