Financial Analysts and the Pricing of Accruals

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Abstract
We investigate the relation between two market anomalies to provide insights into analysts' role as information intermediaries. Prior research finds that accruals and analyst earnings forecast revisions predict future returns. We find that the accrual and forecast revision strategies generate returns of 15.5% and 5.5% when implemented independently. Strikingly, a combined strategy that uses forecast revisions to refine the accrual strategy generates a return of 28.5%. Firms with consistent accrual and forecast revision signals have less persistent accruals and earnings. We also find that accruals can be used to refine the forecast revision strategy - high accruals are associated with overoptimism in analyst forecasts. Our findings indicate that although forecast revisions reflect information about accrual and earnings persistence beyond that reflected in the level of current year accruals, investors do not fully incorporate this information into their valuation assessments.