Prior literature observes that information uncertainty exacerbates investor underreaction behavior. In this paper, I investigate whether, as professional investment intermediaries, sell‐side analysts suffer more behavioral biases in cases of greater information uncertainty. I show that greater information uncertainty predicts more positive (negative) forecast errors and subsequent forecast revisions following good (bad) news, which corroborates previous findings on the post‐analyst‐revision drift. The opposite effects of information uncertainty on forecast errors and subsequent forecast revisions following good versus bad news support the analyst underreaction hypothesis and are inconsistent with analyst forecast rationality or optimism suggested in prior literature.

This paper investigates two competing hypotheses for the accrual anomaly: investment/growth and persistence. Both investment/growth and persistence information in accruals are likely to vary cross-sectionally, depending on a firm's business model, a fact that generates different cross-sectional implications for the accrual anomaly. I find that the magnitude of the accrual anomaly monotonically increases with the investment information contained in accruals, as measured by the co-variation between accruals and employee growth. In industries/firms in which accruals co-vary with employee growth, accruals show strong predictive power for future stock returns. In industries/firms in which accruals show little correlations with employee growth, the accrual anomaly is much weaker. In contrast, the evidence from the cross-sectional analysis is inconsistent with the persistence argument. From the earnings perspective, the evidence on one-year-ahead earnings growth is inconclusive, but the results on longer-term earnings growth support the investment argument but not the persistence argument. Collectively, I conclude that these results support the view that the accrual anomaly is attributable to the fundamental investment information contained in accruals.

There is substantial evidence of short‐term stock price continuation, which the prior literature often attributes to investor behavioral biases such as underreaction to new information. This paper investigates the role of information uncertainty in price continuation anomalies and cross‐sectional variations in stock returns. If short‐term price continuation is due to investor behavioral biases, we should observe greater price drift when there is greater information uncertainty. As a result, greater information uncertainty should produce relatively higher expected returns following good news and relatively lower expected returns following bad news. My evidence supports this hypothesis.

We take up Cochrane’s (2011) challenge to identify the firm characteristics that provide independent information about average U.S. monthly stock returns by simultaneously including 94 characteristics in Fama-MacBeth regressions that avoid overweighting microcaps and adjust for data-snooping bias. We find that while 12 characteristics are reliably independent determinants in non-microcap stocks from 1980 to 2014 as a whole, return predictability sharply fell in 2003 such that just two characteristics have been independent determinants since then. Outside of microcaps, the hedge returns to exploiting characteristics-based predictability also have been insignificantly different from zero since 2003.

We examine firms' financial reporting practices during the missing months that are induced by fiscal year changes and not covered by regular quarters. We find that firms tend to report much lower income for the missing months than for adjacent quarters, mainly by recording higher operating expenses. We also find that managers have various incentives to manage earnings. Executive compensation is not tied to firm performance in the transition period as it is in adjacent fiscal years. Growth firms, firms with poor stock returns, and firms with weak external and internal monitoring tend to manage earnings more. Finally, we find that firms are more likely to meet or beat earnings targets in the subsequent quarter by reporting lower income in the missing months. Investors and analysts perceive the earnings surprise to be less persistent in the quarter after than in the quarter before the missing months. Data Availability: Data are available from sources identified in the paper.

Interpreting accruals as working capital investment, we hypothesize based on "q"-theory that firms optimally adjust their accruals in response to discount rate changes. A higher discount rate means less profitable investments and lower accruals, and a lower discount rate means more profitable investments and higher accruals. Our evidence supports this optimal investment hypothesis: (1) adding an investment factor into standard factor regressions substantially reduces the magnitude of the accrual anomaly, often to insignificant levels; (2) accruals covary negatively with discount rate estimates from the dividend discounting model, and for the most part, with estimates from the residual income model; (3) accruals with low accounting reliability covary more with capital investment than accruals with high accounting reliability; and (iv) expected returns to accruals-based trading strategies are time-varying, suggesting that the deterioration of the accrual effect in recent years might be temporary and likely to mean-revert in the near future. Copyright (c), University of Chicago on behalf of the Accounting Research Center, 2009.

A fundamental property of accrual accounting is to smooth temporary timing fluctuations in operating cash flows, indicating an inherent negative correlation between accruals and cash flows. We show that the overall correlation between accruals and cash flows has dramatically declined in magnitude over the past half century and has largely disappeared in more recent years. The adjusted R 2 from regressing (changes in) accruals on (changes in) cash flows drops from about 70% (90%) in the 1960s to near zero (under 20%) in more recent years. In exploring potential reasons for the observed attenuation, we find that increases in non‐timing‐related accrual recognition, as proxied by one‐time and nonoperating items and the frequency of loss firm‐years, explain the majority of the overall decline. On the other hand, temporal changes in the matching between revenues and expenses, and the growth of intangible‐intensive industries play only a limited role in explaining the observed attenuation. Finally, the relative decline of the timing role of accruals does not appear to be associated with an increase in the asymmetrically timely loss recognition role.