Practical Applications of Earnings Quality Revisited

Abstract

The accruals anomaly as an earnings-quality strategy stopped working in the mid-2000s, when performance faltered and popularity waned, but since the end of 2008, it has staged a major comeback.

The research in Earnings Quality Revisited , published in the Summer 2013 issue of The Journal of Portfolio Management , was prompted by a desire to revisit the earnings-quality strategy which hasn’t gotten much attention from the academic and practitioner communities in the past five to seven years.

Co-author Jennifer Bender, Managing Director for Research at State Street Global Advisors (SSgA), says institutional investors are interested in factors that outperform the market, and many incorporate the accruals anomaly. “We’re showing people there is still value in a signal that many say had its heyday a long time ago.”

Bender and co-author Frank Nielsen, Managing Director for Research at Fidelity Investments , evaluate whether earnings quality is a true alpha signal, a risk factor, or both. Their research shows that even though earnings quality is a true alpha factor, or signal, it is not a good risk factor.