The Relationship between Firm-Specific Discretionary Accruals and Stock Future Abnormal Returns

Document Type : Research Paper

Authors

1 Associate Prof., Department of Accounting, Faculty of Economic and Administrative Science, Ferdowsi University of Mashhad, Mashhad, Iran

2 M.Sc., Department of Accounting, Faculty of Economic and Administrative Science, Ferdowsi University of Mashhad, Mashhad, Iran

Abstract

Objective: The purpose of this research is to investigate the relationship between Firm-Specific Discretionary Accruals andStock Future Abnormal Returns on Tehran Stock Exchange.
Methods: This studycarries out according to the information available in listed Companies in the Tehran Stock Exchange (TSE), during 2011 to 2016, on a selected sample consisting of 190 companies. To test the research hypothesis, OLS regression has) been used.
Results: The results show that there is a negative and significant relationship between Firm-Specific Discretionary Accruals andStock Future Abnormal Returns.
Conclusion: Investors should distinguish between the stability of profit components (cash and accrual) when valuing companies. The disregard of this difference has made investors optimistic about the future performance of companies when the Firm-Specific Discretionary Accruals is high, and pessimistic about the future of companies when Firm-Specific Discretionary Accruals is low. Therefore, if such unskilled investors were affected on stock price, we would expect high prices for companies with high Firm-Specific Discretionary Accruals and low prices for companies with low Firm-Specific Discretionary Accruals. In fact, companies are valued incorrectly and irrationally and since the stability of Firm-Specific Discretionary Accruals is low, in future periods, they will receive less than expected returns (negative abnormal returns) and companies with low Firm-Specific Discretionary Accruals will earn more than expected returns (positive abnormal returns).

Keywords

References

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Accounting and Auditing Review
Volume 26, Issue 1
2019
Pages 151-168

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