Explaining the Accruals Anomaly: Evidence from Insider Trades

Abstract

We examine competing explanations of the accruals anomaly, fixation and agency, using insider trading patterns and valuation measures. Quadratic regressions which control for confounding effects confirm an asymmetric relationship between trades and accruals concentrated on the selling side, supporting an overvalued equity agency explanation. Further evidence is provided by tests using valuation. The relationship between accruals and trading is only significant within the low book-to-market (BM) firms. There is also evidence that high BM firms manage their earnings upward compared to low BM firms. Tests using a subset of firms sorted on valuation ratios and past growth also support the agency explanation with evidence of a strong relationship between sales and accruals for the glamor firms while buying and accruals are not related for the value firms.