Last Measure Standing - Gross Profitability's Role in the Demise of the Accrual Anomaly

Sammanfattning: We confirm the previously well-evidenced negative relation between the accrual part of earnings and future excess stock returns for the period 1990-1999, and show that this relation has become statistically insignificant for the period 2000-2010. As a contrasting measure underlying only limited accounting subjectivity, we show gross profitability to be negatively related to future excess stock returns under lax controls, and find this relation to become slightly stronger in the period 2000-2010. Based on the theories of earnings manipulation and adaptive market efficiency, we highlight the possibility that the gain in prediction power of gross profits is due to an increase of investors' focus on more objective measures than earnings, as reaction to the revelation of the accrual anomaly.