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Keywords:

  • Accruals quality;
  • Analyst forecasts;
  • Expected returns;
  • Implied cost of equity capital;
  • Information risk
  • D80;
  • G14;
  • M41

Abstract

This study investigates whether accruals quality (AQ) influences the expected returns of stock investors. We employ estimates of the implied cost of equity capital (ICOE) as the expected returns of stock investors because they are well specified ex ante without the need for noisy realized returns. Extending a current debate on AQ pricing, we control for several properties of analysts’ forecasts and find that AQ is positively and significantly related to ICOE. In addition, AQ is more closely related to the innate component than to the discretionary component. However, even after controlling for innate factors, we find that investors also price the discretionary component. Finally, we show that the relationship between AQ and ICOE is more pronounced for firms in poor information environments, such as small firms and firms with a low analyst following, implying that a firm’s information environment influences the relationship between AQ and ICOE.