The accrual anomaly in Europe: The role of accounting distortions

Georgios A. Papanastasopoulos, Emmanuel Tsiritakis

    Research output: Contribution to journalArticlepeer-review

    Abstract

    Numerous studies claim that the accrual anomaly in the U.S. stock market is due mostly to temporary accounting distortions arising from accrual accounting. We examine the validity of this explanation in an international setting. Across the 15 developed European equity markets we examine, accounting distortions contribute to the negative relation between accruals and future earnings performance in 14 equity markets. Further, we show that the negative relation between accruals and stock returns could be at least attributable to accounting distortions. In particular, accruals related to accounting distortions predict returns in 7 out of the 9 markets where the accrual anomaly occurs in Europe. Finally, we show that the impact of accounting distortions on the pricing of the accrual component of earnings is stronger in markets with a higher level of trust and a lower level of secrecy.

    Original languageEnglish
    Pages (from-to)176-185
    Number of pages10
    JournalInternational Review of Financial Analysis
    Volume41
    DOIs
    Publication statusPublished - 1 Oct 2015

    Keywords

    • Accounting accruals
    • Accounting distortions
    • Accrual anomaly
    • International stock markets
    • Trust

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