Critics on the research paper: The market pricing of accruals quality (Jennifer Francis, Ryan LaFond, Per Olsson, Katherine Schipper)

Résumé du document

The paper "The market pricing of accruals quality" sustains that the quality of accruals is priced by the financial markets. We can judge the value of this research by wondering to what extent, from a methodological and theoretical point of view, the accrual quality has an impact on the opportunity cost on capital. In the first place, we will summarize the strengths of the research paper; this point will allow us to come to underline the weaknesses of the empirical method in a second section; eventually, we will notice the limitations of the theoretical approach. According to the authors, accruals quality has an impact on the information risk and subsequently on the cost of capital: the poorer the accruals quality is, the greater the cost on debt and equity is. Nevertheless, innate accruals quality has a larger impact on the cost of capital than discretionary accruals quality has. Unlike cash accounting, in which transactions are registered only when flows are paid or received, accrual accounting respects the matching principle and economic events are recognised when transactions occur and not when payment is made.

Extraits

[...] In the same way, the expected correlation between beta and the cost of equity is positive but the observed relation is negative. They explain these differences by conjecturing that on the one hand, the cost of debt is a noisy proxy for the underlying construct, and that on the other hand, the negative association is due to a correlation between beta and size or leverage. However, we can wonder if other results, for example the correlation between accruals quality and the costs of debt and equity, are still significant .3/ The empirical results turn out to be smaller in the additional tests: The authors conduct some additional tests as well in this paper. [...]

[...] These results are confirmed by another paper Audit quality and the pricing of discretionary accruals. Opportunism can incite managers to report aggressive accruals; thus, high-accruals firms face greater agency costs than low-accruals firms do. Auditing reduces the agency costs between top management and investors or creditors by requiring the managers to register proper discretionary accruals. However, the pricing of the audit quality is limited because of the diversifiable discretionary component. On the contrary, outsiders may demand a higher cost of capital to compensate for the systematic innate component. [...]

[...] Critics on the research paper: The Market Pricing of Accruals Quality (Jennifer Francis, Ryan LaFond, Per Olsson, Katherine Schipper) The paper market pricing of accruals quality” sustains that the quality of accruals is priced by the financial markets. We can judge the value of this research by wondering to what extent, from a methodological and theoretical point of view, the accrual quality has an impact on the opportunity cost on capital. In the first place, we will summarize the strengths of the research paper; this point will allow us to come to underline the weaknesses of the empirical method in a second section; eventually, we will notice the limitations of the theoretical approach. [...]

[...] The effect of accruals quality on the cost of capital increases with the fundamental risk. There is no relation between accruals quality and opportunity cost of capital for firms with the lowest fundamental risk. By contrast, for firms with the highest fundamental risk, there is a strong relation between accruals quality and cost of capital. The interaction between accruals quality and fundamental risk is significantly related to the cost of capital / Accruals quality is neither a priced risk factor nor a determinant of the cost of capital In the paper Is accruals quality a priced risk factor?, the authors remind us there is neither evidence that accounting quality affects the expected returns nor that the information risk is either diversifiable or systematic. [...]

[...] The authors use the Dechow & Dichev model and measure accruals quality according to the mapping of working capital accruals into operating cash flow realizations. This model is based on the idea that, regardless of the discretional intent, accruals quality is affected by the measure of the intentional or unintentional error in accruals. This hypothesis is questionable because, as a practical matter, the Dechow & Dichev approach is limited to current accruals and not extended to non-current accruals. The authors also consider proxies based on the absolute value of the abnormal accruals, which are estimated by using the Jones model. [...]