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Reexamination of whether accrual quality is a price factor

In this study, we investigate whether accrual quality is a factor in capital asset pricing. Our analysis consists of two parts. First, we use a panel data regression that controls for cross-section fixed effects to implement the second stage of the Fama-MacBeth regression (Petersen 2009). | http afr. sciedupress.com Accounting and Finance Research Vol. 8 No. 3 2019 Reexamination of Whether Accrual Quality Is a Price Factor May Xiaoyan Bao1 Xiaoyan Cheng2 John Geppert3 David B. Smith3 1 Peter T. Paul College of Business and Economics University of New Hampshire USA 2 College of Business Administration University of Nebraska-Omaha USA 3 College of Business University of Nebraska-Lincoln USA Correspondence May Xiaoyan Bao Peter T. Paul College of Business and Economics University of New Hampshire 10 Garrison Ave Durham NH 03824 USA Received June 13 2019 Accepted July 5 2019 Online Published July 8 2019 doi 10.5430 afr.v8n3p103 URL https doi.org 10.5430 afr.v8n3p103 Abstract In this study we investigate whether accrual quality is a factor in capital asset pricing. Our analysis consists of two parts. First we use a panel data regression that controls for cross-section fixed effects to implement the second stage of the Fama-MacBeth regression Petersen 2009 . In the second part we use the Campbell 1991 return decomposition and vector autoregressive model VAR to decompose the two-stage cross-sectional regressions. This allows us to investigate whether accrual quality is a priced factor in terms of the three components of the return which include one-period expected return cash flow news and discount-rate news. Keywords asset-pricing tests accruals quality information risk portfolio theory and diversification return decomposition We thank the financial support of Peter T. Paul Financial Policy Center at Peter T. Paul College of Business and Economics University of New Hampshire. 1. Introduction Whether information risk impacts a firm s cost of equity capital has been a controversial issue in the accounting and finance literature. Prior theoretical research shows that information risk is a non-diversifiable risk factor e.g. Amihud Mendelson 1986 Easley O Hara 2004 Leuz Verrecchia 2005 Francis LaFond Olsson Schipper 2005 . This research conflicts with empirical