Accruals and Momentum

We view accruals as a natural candidate to link to momentum in the context of the overreaction explanation. Accruals can proxy for ambiguity about the implications of new information for a firm's value and can vary with the business cycle. Thus, higher accruals can lead to greater behavioral biases in the cross‐sectional and time‐series dimensions and, hence, stronger momentum. Our results show that momentum profitability is mostly concentrated in firms with high accruals. The previously documented cross‐sectional characteristics of momentum and market states do not subsume the effect of accruals on momentum. We also find that most of the momentum returns among high‐accrual firms are attributable to high discretionary accruals.