Accrual quality, skill, and the cross-section of mutual fund returns

Journal Article (Journal Article)

We use returns of actively managed mutual funds to document the link between accrual quality (AQ) and systematic (priced) risk. Despite compelling theoretical arguments, prior research finds no evidence that poor AQ commands a risk premium in the cross-section of realized stock returns. We argue that the previously obtained premium estimates are biased downward because, for a large portion of poor AQ stocks, higher expected returns are offset by the news of deteriorating fundamentals. We suggest that skilled mutual fund managers should be able to either avoid investing in stocks with deteriorating fundamentals or assign them lower portfolio weights. As a consequence, returns on their portfolios should better reflect the expected AQ risk premium. Our empirical evidence is consistent with these predictions.

Full Text

Duke Authors

Cited Authors

  • Nallareddy, S; Ogneva, M

Published Date

  • June 1, 2017

Published In

Volume / Issue

  • 22 / 2

Start / End Page

  • 503 - 542

International Standard Serial Number (ISSN)

  • 1380-6653

Digital Object Identifier (DOI)

  • 10.1007/s11142-017-9389-z

Citation Source

  • Scopus