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Why do high levels of accruals appear to be mispriced?
Solution
Richardson, Sloan, Soliman, and Tuna find empirical evidence that suggests that accruals are
related to earnings persistence. In addition, the less reliable the accruals, the lower the earnings
persistence. Furthermore, they find that the market does not fully price the less reliable accruals.
Future stock returns appear to be negatively related to accruals, and the negative relation is
stronger for less reliable accruals. Liu and Qi provide evidence that the potential mispricing of
accruals is substantial.
There are a number of possible reasons for the mispricing. Na

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Why do high levels of accruals appear to be mispriced-SolutionRichards.docx

  • 1. Why do high levels of accruals appear to be mispriced? Solution Richardson, Sloan, Soliman, and Tuna find empirical evidence that suggests that accruals are related to earnings persistence. In addition, the less reliable the accruals, the lower the earnings persistence. Furthermore, they find that the market does not fully price the less reliable accruals. Future stock returns appear to be negatively related to accruals, and the negative relation is stronger for less reliable accruals. Liu and Qi provide evidence that the potential mispricing of accruals is substantial. There are a number of possible reasons for the mispricing. Na