Abstract
We establish a robust link between momentum and accruals. Momentum profitability is mostly concentrated in firms with high accruals. Cross-sectional characteristics of momentum previously documented do not subsume the effect of accruals on momentum. Loser stocks with high accruals experience significant decreases in industry-adjusted sales growth and the largest amount of income-decreasing special items in subsequent years. Most of momentum profit among high-accrual firms is attributable to the high discretionary accrual group. Our findings indicate that due to the joint force of earnings overestimation and earnings manipulation, the downward payoff of loser stocks with high accruals largely drives the accrual-based momentum profit.
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