Accruals quality, stock returns seasonality and the cost of equity capital
type: CreativeWork
description: Despite considerable interest among accounting researchers in recent years regarding whether accruals quality should be priced by equity markets, and whether any pricing effect detected is attributable to risk, these questions remain among the more controversial in accounting research. This thesis comprises a brief introduction to theory underpinning the pricing of information risk, followed by three essays investigating the empirical relationship between accruals quality and the cost of capital. The final chapter presents my conclusions. Essay 1 examines whether previously documented associations between accruals quality (AQ) and the cost of equity capital for US firms are driven singularly by returns in the month of January, consistent with a tax-loss selling effect (Mashruwala and Mashruwala, 2011). However, I argue that controlling for potential biases arising from low-priced stocks is essential when testing the seasonality of AQ pricing, as the biased returns of low-priced stocks are likely to be systematically related to the tax-loss selling effect. Consequently, I re-examine seasonality in the pricing of AQ and find that (1) for samples excluding low-priced stocks, poor-AQ firms outperform good-AQ in a number of non-January months and collectively across non-January months; and (2) there is a significant AQ premium reflected in the implied cost of equity capital. Overall, my results suggest that the documented AQ premium is unlikely to be singularly driven by tax-loss selling. Essay 2 employs three separate analyses to investigate the source of the observed AQ premium. First, I examine the impact of an exogenous shock to taxation incentives, the introduction of 1986 Tax Reform Act (TRA); Second, I investigate whether the AQ premium is conditioned by the level of competition for firms' stock; and third, I examine the pricing of the quality of specific accruals. I find that: (1) although a November AQ premium exists in the post-TRA period, this premium is unlik…
abstract: Despite considerable interest among accounting researchers in recent years regarding whether accruals quality should be priced by equity markets, and whether any pricing effect detected is attributable to risk, these questions remain among the more controversial in accounting research. This thesis comprises a brief introduction to theory underpinning the pricing of information risk, followed by three essays investigating the empirical relationship between accruals quality and the cost of capital. The final chapter presents my conclusions. Essay 1 examines whether previously documented associations between accruals quality (AQ) and the cost of equity capital for US firms are driven singularly by returns in the month of January, consistent with a tax-loss selling effect (Mashruwala and Mashruwala, 2011). However, I argue that controlling for potential biases arising from low-priced stocks is essential when testing the seasonality of AQ pricing, as the biased returns of low-priced stocks are likely to be systematically related to the tax-loss selling effect. Consequently, I re-examine seasonality in the pricing of AQ and find that (1) for samples excluding low-priced stocks, poor-AQ firms outperform good-AQ in a number of non-January months and collectively across non-January months; and (2) there is a significant AQ premium reflected in the implied cost of equity capital. Overall, my results suggest that the documented AQ premium is unlikely to be singularly driven by tax-loss selling. Essay 2 employs three separate analyses to investigate the source of the observed AQ premium. First, I examine the impact of an exogenous shock to taxation incentives, the introduction of 1986 Tax Reform Act (TRA); Second, I investigate whether the AQ premium is conditioned by the level of competition for firms' stock; and third, I examine the pricing of the quality of specific accruals. I find that: (1) although a November AQ premium exists in the post-TRA period, this premium is unlik…
author: Zhang, Lijuan
language: en_AU
date published: 2014
date modified: 2026-07-24T01:07:11Z
provider: Australian Catholic University
publisher: Networked Digital Library of Theses and Dissertations
type: WebPage
source organization: Australian Catholic University

PropertyValue
property ID: Handle
value: http://hdl.handle.net/1885/155532