This paper investigates the question of whether so-called anomalous returns predicted by accounting numbers are normal returns for risk or abnormal returns. It does so via a model that shows how accounting numbers inform about normal returns if pricing were rational. The model equates expected returns to expectations of earnings and earnings growth, so that any variable that forecasts earnings and earnings growth also forecasts required returns if the market prices those outcomes as risky. The empirical results indicate that many accounting anomaly variables forecast forward earnings and growth, and in the same direction in which they forecast returns. These variables include accruals, asset growth, profitability, investment, net share issuance, and external financing. In short, the observed "anomalous" returns associated with these accounting numbers are consistent with the rational pricing.
Penman, Stephen, and Julie Zhu. "Accounting Anomalies, Risk and Return." Working Paper, Columbia Business School, March 2011.
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