Weighing the evidence on the relation between external corporate financing activities, accruals and stock returns

Daniel A. Cohen, Thomas Z. Lys*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

19 Scopus citations

Abstract

Bradshaw, Richardson, and Sloan (BRS) find a negative relation between their comprehensive measure of corporate financing activities and future stock returns and future profitability. Noticing that accounting accruals are increases in net operating assets on a company's balance sheet, we question whether it is possible to distinguish between the 'external financing anomaly' documented by BRS and the 'accrual anomaly' first documented by Sloan [1996. Do stock prices fully reflect information in accruals and cash flows about future earnings? The Accounting Review 71, 289-315]. We show that once controlling for total accruals, the relation between external financing activities and future stock returns is attenuated and not statistically significant. These findings are consistent with Richardson and Sloan [2003. External financing, capital investment and future stock returns. Working Paper, University of Pennsylvania and University of Michigan].

Original languageEnglish (US)
Pages (from-to)87-105
Number of pages19
JournalJournal of Accounting and Economics
Volume42
Issue number1-2
DOIs
StatePublished - Oct 2006

Keywords

  • Capital markets
  • External financing
  • Market efficiency
  • Sell-side analysts

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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