Graduation Year
2018
Date of Submission
4-2018
Document Type
Open Access Senior Thesis
Degree Name
Bachelor of Arts
Department
Economics
Reader 1
Professor George Batta
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2018 Kanishk Kapur
Abstract
In 1996, Sloan identified the accruals anomaly, in which the negative relationship between the accruals component of current earnings and subsequent stock returns can be exploited to generate excess returns. One would expect the accruals anomaly to dissipate and ultimately disappear as investors take advantage of the now-public information. However, nearly two decades later, it persists as one of the most prominent and contentious anomalies; its magnitude of current and future excess returns still remain controversial. The main reason for its persistence is that extreme accrual firms possess characteristics that are unappealing to most investors. These characteristics, which include insufficient analyst coverage, high idiosyncratic volatility and the presence of institutional constraints, are generally more pronounced in firms with weak internal controls. This paper finds that the accruals anomaly persists at a higher magnitude in firms with weak internal controls. This higher magnitude of excess returns survives the Fama-French five-factor (2015), the Stambaugh-Yuan four-factor (2017) and the Hou, Xue, and Zhang (2015) q-factor models.
Recommended Citation
Kapur, Kanishk, "Is the Accruals Anomaly More Persistent in Firms With Weak Internal Controls?" (2018). CMC Senior Theses. 1884.
https://scholarship.claremont.edu/cmc_theses/1884
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