The asymmetric effect of discretionary and nondiscretionary components of accruals on the relation between earnings dispersion and excess stock returns

Document Type : Research Paper

Authors

Accounting Department, Faculty of Economics, Management and Administrative Sciences, Semnan University, Semnan, Iran

Abstract

This paper aims to investigate the asymmetric effect of discretionary and nondiscretionary components of accruals on the relation between earnings dispersion and excess returns. With the increase of discretionary and nondiscretionary components of accruals, what behavior does the earnings distribution show and what effect does this issue have on the excess returns? This research presents an asymmetric correlation in terms of method and nature. Using a systematic sampling method from the companies listed in the Tehran Stock Exchange (TSE), 137 companies were selected as a sample from 2014 to 2020. After examining the classical assumptions of regressions, the panel data model with fixed effects was determined. The results show that (1) there is a positive and significant relation between earnings dispersion and excess stock returns, (2) the accrual's discretionary components have an insignificant effect on the relation between earnings dispersion and excess stock returns, (3) with the increase of discretionary components of accruals, the relation between earnings dispersion and excess stock returns increases, (4) the accrual's nondiscretionary components have a negative and significant effect on the relation between earnings dispersion and excess stock returns, (5) with the increase of accrual's nondiscretionary components, the relation between earnings dispersion and excess stock returns goes up.

Keywords

[1] H. Abou-El-Sood and D. El-Sayed, Abnormal disclosure tone, earnings management and earnings quality, J. Appl. Account. Res. 23 (2022), no. 2, 402–433.
[2] L.F. Ackert and G. Athanassakos, The relationship between short interest and stock returns in the Canadian market, J. Bank. Financ. 29 (2005), no. 7, 1729–1749.
[3] R. Ball, J. Gerakos, J.T. Linnainmaa, and V. Nikolaev, Earnings, retained earnings, and book-to-market in the cross section of expected returns, J. Financ. Econ. 135 (2020), no. 1, 231–254.
[4] O.E. Barron, M.H. Stanford, and Y. Yu, Further evidence on the relation between analysts’ forecast dispersion and stock returns, Contemp. Account. Res. 26 (2009), no. 2, 329–357.
[5] M.T. Bradshaw, S.A. Richardson, and R.G. Sloan, Do analysts and auditors use information in accruals?, J. Account. Res. 39 (2001), no. 1, 45–74.
[6] K. Chan, L. Chan, N. Jegadeesh, and J. Lakonishok, Earnings Quality and Stock Returns, National bureau of economic research Cambridge, Mass., USA, 2001.
[7] M.S. Drake and L.A. Myers, Analysts’ accrual-related over-optimism: do analyst characteristics play a role?, Rev. Account. Stud. 16 (2011), no. 1, 59–88.
[8] T. Fei, X. Liu, and C. Wen, Cross-sectional return dispersion and volatility prediction, Pacific-Basin Financ. J., 58 (2019), 101218.
[9] X. Feng, K.C. Chan, and D. Yang, Short sale constraints, dispersion of opinion, and stock overvaluation: Evidence from earnings announcements in China, North Am. J. Econ. Financ. 41 (2017), 217–230.
[10] M.A. Harjoto and H. Jo, Legal vs. normative CSR: Differential impact on analyst dispersion, stock return volatility, cost of capital, and firm value, J. Bus. Ethics 128 (2015), no. 1, 1–20.
[11] K. Hou, C. Xue, and L. Zhang, Replicating anomalies, Rev. Financ. Stud. 33 (2020), no. 5, 2019–2133.
[12] T.C. Johnson, Forecast dispersion and the cross section of expected returns, J. Finance 59 (2004), no. 5, 1957–1978.
[13] S. Kim and H. Na, Earnings information, arbitrage constraints, and the forecast dispersion anomaly, Financ. Res. Lett. 35 (2020), 101311.
[14] A. Levin, C.F. Lin, and C.S.J. Chu, Unit root tests in panel data: asymptotic and finite-sample properties, J. Economet. 108 (2002), no. 1, 1–24.
[15] S. Liu, J. Yao, and S. Satchell, Analyst forecast dispersion and market return predictability: Does conditional equity premium play a role?, J. Risk Financ. Manag. 13 (2020), no. 5, 98.
[16] R. Sadka and A. Scherbina, Analyst disagreement, mispricing, and liquidity, J. Finance 62 (2007), no. 5, 2367–2403.
[17] S. E. Stickel, Predicting individual analyst earnings forecasts, J. Account. Res. 28 (1990), no. 2, 409–417.
[18] D. Veenman and P. Verwijmeren, The earnings expectations game and the dispersion anomaly, Manage. Sci. 68 (2022), no. 4, 3129–3149.
[19] M. Zhao, Y. Ke, and Y. Yi, The effects of risk factor disclosure on analysts’ earnings forecasts: evidence from Chinese IPOs, Asia-Pacific J. Account. Econ. 29 (2022), no. 4, 866–895.
Volume 15, Issue 9
September 2024
Pages 239-246
  • Receive Date: 14 November 2022
  • Accept Date: 04 March 2023