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Intertemporal accrual persistence and accrual anomaly
Xiumin Martin,
University of Missouri Columbia
ABSTRACT. Prior accounting research notes that diminishing marginal returns on new investments drive lower persistence of accruals. Macroeconomic research documents that marginal profitability is counter-cyclical. Linking findings from the two streams of research, I predict that accrual persistence will vary with the business cycle. Using a U.S. sample from 1972 to 2003, I find that accruals are less persistent during economic expansions than recessions. I also find that depreciation, change in accounts receivable, change in raw materials, and change in finished goods are the main drivers of cyclical accrual persistence. These findings are robust to alternative conditioning sets, estimation procedures, and measures of the business cycle. I also find higher returns (both raw and abnormal returns) from an accrual-based trading strategy during expansionary periods which is consistent with the argument that investors are unable to assess the counter-cyclical persistence of accruals.
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