TitleEssays on financial anomalies
NameGu, Ming (author), Wu, Yangru (chair), Ronen, Tavy (internal member), Fang, Vivian (internal member), Hovakimian, Armen (outside member), Rutgers University, Graduate School - Newark,
DescriptionThis dissertation studies two pervasive financial anomalies: price momentum and accrual anomaly. The first essay establishes a robust link between momentum and accruals (the difference between accounting earnings and cash flow). I find that momentum profitability is statistically significant and economically large only among firms with high accruals. The cross-sectional characteristics of momentum previously documented do not subsume the effect of accruals on momentum profits, and the effect also holds in different market states. To understand the source of momentum, I analyze the predictive power of accruals for stock returns based on two hypotheses: earnings manipulation and earnings overestimation. I find that loser stocks with high accruals experience significant decreases in industry-adjusted sales growth and the largest amount of income-decreasing special items in subsequent years. Most of momentum profitability among high-accrual firms is attributable to the high discretionary accrual group. My findings indicate that, primarily due to the effect of earnings manipulation, the downward payoff of loser stocks with high accruals largely drives the accrual-based momentum profit. The second essay investigates the relationship between financial distress and accrual anomaly. I investigate whether the continued existence of the accrual anomaly is due to the failure to account for the compensation for distress risk. I find a U-shape pattern of distress risks across accrual portfolios. The accrual profit is mostly concentrated in firms with high distress, suggesting that the abnormal returns to the accrual trading strategy may result from the high distress-risk exposures. Market frictions such as idiosyncratic stock return volatility, illiquidity, and short-sale constraints do not generate the accrual anomaly, but they prevent stock prices from adjusting once financial distress triggers the abnormal returns to the accrual trading strategy.
NoteIncludes bibliographical references
Noteby Ming Gu
CollectionGraduate School - Newark Electronic Theses and Dissertations
Organization NameRutgers, The State University of New Jersey
RightsThe author owns the copyright to this work.