The Study On The Accrual Anomaly Based On Accounting Conservatism

As an intermediary place for property transactions, the capital market has played an important role in the entire economic development. In the capital market, accounting information is an important basis by which investors can understand the specific situation of listed companies. One of the most important roles of accounting information is the property of recognition, measurement, recording and reporting. Accounting information can provide investors with useful decision-making information. Research on the reactions of accounting information in the capital market has been a hot issue.Efficient Market Hypothesis suggests that, in terms of information, the market is efficient. That means the stock price is the proper response to all of the information at any time. According to available information, no one can obtain excess returns. However, since the1980s, the domestic and foreign scholars have found some anomalies which are in conflict with Efficient Market Hypothesis. These anomalies indicate that in some cases the investors incorrectly understand the meaning of accounting information, thus fail to respond appropriately to the accounting information. Among them, the "Accrual Anomaly" attracted the attention of domestic and overseas scholars. The accrual anomaly, which is proposed by Sloan (1996), means that the investors can structure a trading strategy of zero investment by use of the accrual mispricing and obtain arbitrage returns that exceed the level of the average market in the next period.Accounting conservatism is one of the important quality requirements of accounting information. When dealing with uncertain business, the accountants required by accounting conservatism cannot overstate assets and income, or underestimate liabilities and cost. That is to say, they must avoid risks brought by current uncertainty as discreet as possible. The results of the operations contain net assets in the balance sheet are conservatively estimated in the long term; cost, expense and loss of asset impairment are recognized ahead of time; earnings would be recognized discreetly. All of these probably influence accruals. Sloan’s research just discussed the different informativeness between accruals and cash flow and did not classify the accounting accruals of different companies. Further, because the level of accounting conservatism of different firm is not the same, the reliability of the accruals of different companies is not the same. Therefore, accounting conservatism can influence the accrual anomaly through changing the informativeness of accruals. Now, the research on economic consequences of accounting conservatism concentrates upon the influence of accounting conservatism to investment and financing. Whether accounting conservatism can influence the capital market efficiency needs further research. In this paper, the problem is discussed. Therefore, the research on the relationship between accounting conservatism and the accrual anomaly is very meaningful. On the one hand, the paper’s research can inspect the cause of the accrual anomaly; on the other hand, the paper’s research can explore the influence of accounting conservatism on the capital market pricing efficiency.On the basis of prior research of the domestic and foreign scholars and combining with accounting and econometrics knowledge, the paper studies the influence of accounting conservatism to the accrual anomaly by using the data of Chinese listed companies. The following research purposes are achieved hopefully。Firstly, the paper explores the cause of the accrual anomaly. From the perspective of accounting conservatism, this paper examines whether the unbalance of the accrual quality is the reason of the accrual anomaly and studies the influence of accounting conservatism to the accrual anomaly. This study provides fresh evidence for the cause of the accrual anomaly expands the existing literature and provides some basis for future research. This is the main purpose of this paper.Secondly, by use of the accounting conservatism and the accrual mispricing, the investors who use the paper’s conclusion can structure a portfolio for obtaining excess returns. The second purpose of the paper is to provide some suggestions for the selection of the portfolio.Lastly, the third purpose of the paper is to investigate influence of accounting conservatism to the capital market efficiency. If the empirical evidence confirms that the accounting conservatism can significantly improve the informativeness of accruals and reduce the accrual anomaly. It means that accounting conservatism can reduce the accrual mispricing and improve the efficiency of the capital market. At the same time, this paper can provide new research literature for the influence of accounting conservatism on the capital market pricing efficiency.The research idea of this paper is as follows. First of all, literature review about the accrual anomaly and the accounting conservatism is to understand the current study of scholars. Secondly, on the basis of theoretical basis, the paper analyses the relationship between accounting conservatism and the accrual anomaly. Thirdly, put forward the research hypotheses of the paper, select the study samples and set up the corresponding research model. Lastly, test the hypotheses by the way of empirical method and draw the conclusions, policy suggestion and further research directions.The paper is structured as follows:Chapter Ⅰ, introduction. Introduce the research background, purpose, research ideas, structure and expected contributions.Chapter Ⅱ, the literature review. Comb the research achievement on the accrual anomaly and accounting conservatism at home and abroad. The literature review is mainly from the four perspectives as follows:the existence of the accrual anomaly, the cause of the accrual anomaly, the existence of accounting conservatism, the economic consequences of accounting conservatism. Brief commentary is in the end.Chapter Ⅲ, theoretical analysis. There are three parts in this chapter. The first part introduces four related concepts:accounting conservatism, earnings persistence and the accrual anomaly. The second part presents four basic theories: Efficient Market Hypothesis, theories of behavioral finance, Information asymmetry and Agency cost theory. The third part analyses the relationship between accounting conservatism and the accrual anomaly by the theories above.Chapter Ⅳ, research design. Put forward three research hypotheses as follows:accounting conservatism can influence the informativeness of accruals, conservatism can influence the accrual mispricing, conservatism can influence the excess arbitrage returns. Then, introduce the sample selection, data sources, the definition of variables and the calculation of key variables. Lastly, set up the corresponding research model.Chapter Ⅴ, empirical test. This paper adopts the data of Chinese A-share listed companies (excluding GEM companies) from2001to2011. Descriptive statistics and correlation analysis are carried out on the sample first. Then, on the basis of verifying the existence of the accrual anomaly and accounting conservatism, test the hypotheses and conduct robustness test of the conclusions.Chapter Ⅵ, conclusions. Combined with the theoretical analysis and empirical results, the paper summarizes the conclusions, proposes the policy suggestion and further research directions.On the basis of confirming the existence of the accrual anomaly and accounting conservatism, the empirical results prove three research hypotheses in Chapter Ⅳ as follows:(1) Higher degrees of conservatism will increase the informativeness of the accruals in high accrual firms;(2) Higher degrees of conservatism will increase future returns from accruals in high accrual firms;(3) Divide the whole firms into two group by the degrees of conservatism, construct portfolio1:in higher degrees of conservatism, long in the lowest accrual decile and short in highest accrual decile firms; at the same time, Construct portfolio2:in lower degrees of conservatism, long in the lowest accrual decile and short in highest accrual decile firms, portfolio1will earn lower abnormal returns compared to portfolio2. Furthermore, the empirical results manifest that the abnormal returns from the portfolio2is higher than the abnormal returns from the whole sample.The empirical results agree well with theoretical analysis. The accrual anomaly arises from the inherent defects of the accrual and the cognition biases of investors. As an important accounting information quality requirements and an effective governance mechanism, accounting conservatism weakened the upward estimates of earnings and increase the reliability and informativeness of the positive accrual. Investors misprice the accruals of the firms of lower degrees of conservatism, but can accurately discern the quality of the accruals of higher degrees of conservatism.Combined with the theoretical analysis and empirical results, the conclusions are drawn as follows. Accounting conservatism increases the reliability and informativeness of accruals in high accrual firms. The market reasonably prices the accruals of high degrees of conservatism and high accrual firms. Higher degrees of conservatism can observably reduce the excess returns of the accrual anomaly.It is evident that, to some extent, accounting conservatism can weaken the accrual anomaly and enhance market efficiency. The accrual anomaly from the total sample arises from the firms of lower degrees of conservatism. The accrual anomaly is quite obvious in the firms of lower degrees of conservatism.Expected contributions are as follows.Firstly, the innovation of research perspective. Previous domestic literature discussed the cause of the accrual anomaly from the attention of investors, the growth of firms, our country’s special system and others. No one started from the accounting conservatism interiorly. However, conservatism directly influences the quality of accruals. Conservatism is a new angle of the research on the accrual anomaly.Secondly, add the related literatures of the economic consequences of accounting conservatism. The research on economic consequences of accounting conservatism is relatively less and mostly concentrates upon the influence of accounting conservatism to investment and financing. The study results of the paper can inspect the influence of accounting conservatism on the capital market pricing efficiency and add the related literatures of the economic consequences of accounting conservatism.Thirdly, the time span of the sample is very long and covers the study interval of some domestic scholars. The research conclusions of this paper can compare with previous scholars’. It will increase the credibility of this paper’s research.