The market pricing of accruals quality

We investigate whether investors price accruals quality, our proxy for the information risk associated with earnings. Measuring accruals quality (AQ) as the standard deviation of residuals from regressions relating current accruals to cash flows, we find that poorer AQ is associated with larger costs of debt and equity. This result is consistent across several alternative specifications of the AQ metric. We also distinguish between accruals quality driven by economic fundamentals (innate AQ) versus management choices (discretionary AQ). see front matter r 2005 Elsevier B.V. All rights reserved. .jacceco.2004.06.003 arch was supported by the Fuqua School of Business, Duke University and the University of he views expressed in the paper are those of the authors’ and do not represent positions of the counting Standards Board. Positions of the Financial Accounting Standards Board are ly after extensive due process and deliberation. We appreciate comments from Ross Watts nd Charles Wasley (the referee); from workshop participants at the Boston Area Research Duke, Missouri, Northwestern, Rochester, University of Southern California, the Southeast esearch Conference 2002 and the Stockholm Institute for Financial Research Conference; Barton, Sudipta Basu, George Benston, Larry Brown, Stephen Brown, Marty Butler, Qi raham, John Hand, Grace Pownall, Eddie Riedl, Michael Smith, Greg Waymire, Joanna y Zimmerman. nding author. Tel.: +1919 660 7817; fax: +1 919 660 7971. dress: [email protected] (J. Francis).