Information-Based Accruals Strategy‪.‬

Introduction It has been well documented that investors frequently fail to detect the lower persistence of the accrual component of earnings, and thus tend to overreact to the information contained in the accruals (e.g., Sloan, 1996; Subramanyam, 1996; Xie, 2001). However, it is still unclear why investors fail to correctly price accruals. Sloan (1996) argues that the mis-pricing is due to some market participants' fixation on the total amount of reported earnings, without regard for the relative magnitude of the accrual and cash flow components of earnings. Teoh et al. (1998a, 1998b) suggest that managers opportunistically manage earnings before initial public offerings (IPOs) and seasoned equity offerings (SEOs), and investors may have failed to detect this. Francis, LaFond, Olsson, and Schipper (2003) present evidence showing that accounting-based trading anomalies (including accruals strategies) can be justified by rational investors' responses to information uncertainty.