| Abstract |
This study investigates the association between information asymmetry and the accrual anomaly. Prior literature argues that earnings management is associated with information asymmetry (e.g., Dye, 1988 | Schipper, 1989 | Trueman and Titman, 1988) and that earnings management is the main phenomenon behind the accrual anomaly (e.g., Xie, 2001 | Pincus et al., 2007). Since accruals due to earnings management are more likely to be unreliable and less persistent (Richardson et al., 2005), we posit that investors’ overestimation of persistence of accruals may be intensified with information asymmetry. Our results reveal that the accrual anomaly is generally concentrated in firms with higher information asymmetry and that investors’ overestimation takes place mainly in the discretionary component of accruals for all levels of information asymmetry. |