Investor sentiment, institutional investors and the accrual anomaly : an empirical analysis of China's listed companies

Abstract

The accrual anomaly is a phenomenon that investors gain future abnormal returns through accruals-based hedge portfolios. This paper first shows that China's institutional investors have a better understanding of the persistence of accounting accruals and they more accurately assess stock prices, and that an accrual-based hedge portfolio yields smaller future abnormal returns for firms with high institutional ownership. The results suggest that in China's stock market, the accrual anomaly can be weakened by the activities of institutional investors. Second, with the cross-section data of listed companies from 2001 to 2013, this paper uses empirical analysis of the classified samples to examine how the stock prices react to accruals with the level of investor sentiment. The results suggest stock prices of companies with a small proportion of institutional investors are more sensitive to the impact of investor sentiment on the accrual anomaly. Lastly, this paper examines the effect of investor sentiment on managers' accrual decisions. I find that accruals are higher in positive sentiment environments for companies with high proportion of individual investors, which suggests managers might be exploiting naive individual investor behavior.