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Risk of Stock Market and the Mispricing of Accruals

Author: WeiZuoXin
Tutor: LuoChaoZuo
School: Southwestern University of Finance and Economics
Course: Accounting
Keywords: Stock risk Earnings quality Accruals
CLC: F832.51
Type: Master's thesis
Year: 2008
Downloads: 89
Quote: 0
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Abstract


On the view of information, accounting earnings just show investors a kind of signal to help them to evaluate future stock returns and risk. Accruals, as an important part of earnings, provide a tool of manipulating profits for corporate managers, and the quality of accruals affects accounting earnings directly. The fluctuating of price is related with corporate value and accounting information reflect corporate value and risk to some degree. Then can accruals reflect stock risk apparently? Can the investors appreciate the mispricing of accruals correctly? If not, how investors reduce stock risk on current conditions? These are all the main problems that we want to know in this paper.In SectionⅡ, we review such theories as basic theory about securities risk, capital asset pricing model (CAPM) and arbitrage pricing theory (APT), and related literature from three points. We find that a lot of researches weight earnings quality by accruals, but almost no papers give enough attention to stock risk from the point of accruals.Then, SectionⅢanalyze qualitatively the risk in Chinese security market in present situation of security market and characteristics of market risk.Christina, Shivaram &Terry(2004) use financial statement data of the universe of firms listed on the NYSE, AMEX and NASDAQ markets, and show that idiosyncratic volatility of stocks in the extreme accrual firms is twice as high as that of firms in the median accrual decile suggesting that the extreme accrual stocks lack close substitutes. Accordingly, SectionⅣuses financial statement data of A shares from 1999 to 2004, and argues empirically the correlation between accruals and the risk and returns of A shares. We conclude that the relation between accruals and the return ratio of stock becomes remarkable with the growing scale, and that accruals have not remarkable adverse relation with stock risk. Based on these conclusion and analysis in SectionⅢ, SectionⅤgives some advices to the investors, and point out the limitation of this paper.

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CLC: > Economic > Fiscal, monetary > Finance, banking > China's financial,banking > Financial market
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