Aggregate accruals and market returns: The role of aggregate M&A activity

Journal Article (Journal Article)

Extant literature documents that aggregate accruals positively predict future market returns and attributes this relation to either changes in discount rates or systematic earnings management. We offer an alternative explanation: aggregate merger and acquisition (M&A) activity drives this relation. M&A activity affects the magnitude of accruals, which in turn drives the market return predictability of aggregate accruals. We find that the ability of both aggregate accruals and discretionary aggregate accruals (a measure of systematic earnings management) to predict market returns disappears after controlling for aggregate M&A activity. Furthermore, aggregate M&A activity predicts future market returns, consistent with a price response to improvements in macroeconomic outcomes due to aggregate M&A activity.

Full Text

Duke Authors

Cited Authors

  • Heater, JC; Nallareddy, S; Venkatachalam, M

Published Date

  • November 1, 2021

Published In

Volume / Issue

  • 72 / 2-3

International Standard Serial Number (ISSN)

  • 0165-4101

Digital Object Identifier (DOI)

  • 10.1016/j.jacceco.2021.101432

Citation Source

  • Scopus