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- Title
Accounting Anomalies, Risk, and Return.
- Authors
Penman, Stephen H.; Lei Zhu, Julie
- Abstract
This paper investigates whether so-called anomalous returns predicted by accounting numbers reflect normal returns for risk or abnormal returns. It does so via a model showing how accounting numbers inform about normal returns if pricing were rational. The model equates expected returns to expectations of earnings and earnings growth, so that any variable that forecasts earnings and earnings growth also indicates the required return if the market prices those outcomes as risky. The empirical results confirm that many accounting anomaly variables (such as accruals, asset growth, and investment) forecast forward earnings and growth, and in the same direction in which they forecast returns. While the lack of an agreed-upon asset pricing model for required returns rules out definitive conclusions, the paper provides both a framework and supporting empirical results indicating that the observed ''anomalous'' returns associated with accounting numbers are consistent with rational pricing.
- Subjects
RATE of return on stocks; RATE of return; RISK; EXPECTED returns; STOCK prices; CORPORATE profits; EARNINGS forecasting
- Publication
Accounting Review, 2014, Vol 89, Issue 5, p1835
- ISSN
0001-4826
- Publication type
Article
- DOI
10.2308/accr-50799