Accruals, growth, accounting distortions and stock returns: The case of FRS3 in the UK

Georgios A. Papanastasopoulos

    Research output: Contribution to journalArticlepeer-review

    4 Citations (Scopus)

    Abstract

    We investigate the accrual anomaly, conditional on the mandatory adoption of Financial Reporting Standard No. 3: Reporting Financial Performance (FRS3) by UK firms. We show that return predictability associated with accruals attributable to accounting distortions is largely attenuated and not statistically significant at conventional levels, after the introduction of FRS3. In contrary, the predictive ability of accruals attributable to growth for future returns is not substantially affected and remains strong in magnitude from the pre-FRS3 to the post-FRS3 periods. As a consequence, total accruals continue to predict returns following FRS3. Overall, our findings are broadly consistent with increased accounting disclosure and investor protection eliminating inefficiencies and promoting accurate share prices in the capital market.

    Original languageEnglish
    Pages (from-to)39-54
    Number of pages16
    JournalNorth American Journal of Economics and Finance
    Volume33
    DOIs
    Publication statusPublished - 1 Jul 2015

    Keywords

    • Accounting distortions
    • Accrual anomaly
    • FRS3
    • Growth

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