Can the earnings fixation hypothesis explain the accrual anomaly?
Date of Issue2011
College of Business (Nanyang Business School)
This paper provides empirical evidence on whether the earnings fixation hypothesis can explain the accrual anomaly originally documented in Sloan (1996). Our analytical model yields the prediction that if investors fixate on reported earnings, the effectiveness of the accrual strategy will increase in the responsiveness of the stock price to earnings and the differential persistence of cash flows relative to accruals. Our empirical evidence confirms our prediction and lends support to the earnings fixation hypothesis.
Review of accounting studies
© 2011 Springer Science+Business Media, LLC. This is the author created version of a work that has been peer reviewed and accepted for publication by Review of Accounting Studies, Springer Science+Business Media, LLC. It incorporates referee’s comments but changes resulting from the publishing process, such as copyediting, structural formatting, may not be reflected in this document. The published version is available at: [http://dx.doi.org/10.1007/s11142-011-9171-6].