Reexamination of Whether Accrual Quality Is a Price Factor

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.