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Do Accruals Exacerbate Information Asymmetry in the Market?
Sonia Wasan,
Virginia Commonwealth University
Jeff P Boone, University of Texas At San Antonio
ABSTRACT. A considerable body of evidence, both archival and experimental, suggests that accounting accruals are heterogeneously interpreted by investors. We examine whether the information asymmetry among investors arising from this heterogeneous interpretation of accruals affects transactions costs in the form of the bid-ask spread and its adverse selection cost. The results of the study provide empirical evidence of a positive association between the adverse selection component of the bid-ask spread and accruals in the yearly analysis. The results of the quarterly event tests also indicate that the adverse selection cost is positively linked to the magnitude of total accruals. Documenting the existence of such a real cost of accruals provides a transactions cost basis for understanding why cost of capital increases with accrual activity (Dechow et al. 1996, Francis et al. 2005) as well as suggesting that such information asymmetries merit serious attention of accounting policy makers.
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