Critics on the research paper: The market pricing of accruals quality (Jennifer Francis, Ryan LaFond, Per Olsson, Katherine Schipper)

Type :

Market study

Pages :

8 pages

Format :

.doc

Published date :

01/15/2009

Category :

Business & market

Sub category :

Marketing

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Summary :

Introdction.
Synthesis of strengths.
1. Accruals quality and its impact on the information risk and the cost of capital.
2. Innate accruals quality vs discretionary accruals quality.
Methodological weaknesses.
1. The specific sample that cannot be applied generally.
2. Questionable hypotheses and methods.
3. Variances between empirical findings and other results.
Theoretical limitations.
1. The systematic component of earning quality risk.
2. The relation between accruals quality and cost of capital.
3. Accruals quality is neither a priced risk factor nor a determinant of the cost of capital.
Bibliography.

Abstract

The paper "The market pricing of accruals quality" sustains that the quality of accruals is priced by the financial markets. We can judge the value of this research by wondering to what extent, from a methodological and theoretical point of view, the accrual quality has an impact on the opportunity cost on capital. In the first place, we will summarize the strengths of the research paper; this point will allow us to come to underline the weaknesses of the empirical method in a second section; eventually, we will notice the limitations of the theoretical approach. According to the authors, accruals quality has an impact on the information risk and subsequently on the cost of capital: the poorer the accruals quality is, the greater the cost on debt and equity is. Nevertheless, innate accruals quality has a larger impact on the cost of capital than discretionary accruals quality has. Unlike cash accounting, in which transactions are registered only when flows are paid or received, accrual accounting respects the matching principle and economic events are recognised when transactions occur and not when payment is made.