The Impact Of Investment Growth To Accrual Anomaly

In the real capital market, there are some market anomalies that can not beexplained by the efficient market theory and capital asset pricing model, and moreand more empirical evidence show the existence of these anomalies.Sloan (1996) isthe first one who find the Accrual anomaly. He found that investors can get excessreturns in the coming year when make arbitrage based on accrual information. Sloanargue that the accruals and cash flow are the two parts of the earnings, but theaccruals’ persistent is lower than the cash flow. Accruals’ low persistence leads to adecline in the future surplus, which eventually led to a smaller future stock returns incompanies that have largest accruals. As the essence of accruals is the growth of netoperating assets, which is closely related with investment growth, this paper attemptsto explore the influence of investment growth to accrual anomaly, to know moreabout the cause of accrual anomaly and promote the development of Chinese stockmarket.Based on the a-share listed companies as research samples, this article uses themethod of regression analysis and making arbitrage, and we divide accrued items intolong-term profit-making accrual and short-term operational accrual. First,based on thefact that long-term accruals contain investment growth information, this article studythe long-term accruals’ and short-term accruals’ relationship with earnings of the nextperiod to find the effect of investment growth to accruals’ low persistence, accordingto the law of diminishing marginal returns. Second, we make arbitrages on differentportfolios, which based on different sizes of accrual and capital expenditure structure,and compare different combinations’ excess returns and the significant level. Whenaccrued arbitrage associated with investment growth, there is an offset effect incomprehensive arbitrage profits, on the other hand, the comprehensive arbitrage profitwill exceed the sum of the two.Third, we study accrued arbitrage profit after controlthe capital expenditure. Last, we use multiple regression analysis to furtherconsiderate the relationship between short-term accruals, long-term accruals, total accruals, capital spending and the stocks’ future excess return. The results show that:there is a negative correlation relationship between long-term operating accruals andfuture earnings. The diminishing marginal returns of investment growth caused thelong-term accruals’ low persistence, which will show the accrued is negatively relatedto the future stock price when reacts to the stock market, namely caused the accrualanomaly; Investors use joint accruals and capital spending to make arbitrage cannotearn more excess return when only use separate arbitrage which based on capitalspending,that means the two related; and after control the capital expenditure, accrualanomaly becomes not obvious, which further verify the accrual anomaly is mainlycaused by investment growth; multiple regression analysis results further support theconclusion.This article studies the low persistence of accruals from the view of investmentgrowth, and how capital spending affect accrued arbitrage profits. Results of thispaper support the investment growth hypothesis, and will help the future study whichcan relate the relationship of different anomaly and the company fundamentals tostudy the accrual anomaly of China’s a-share market.