Accruals anomalies could be explained by the adverse selection risk induced by the information structure: the case of the Japanese securities market

Accruals are regarded as investments in working capital and are an integral component in the growth process of firms. By assuming asymmetry of information among investors when predicting the returns on such investments, investors are exposed to adverse selection problems. Consequently, in market equilibrium, investors are believed to require compensation for the systematic risk associated with adverse selection exposure. By constructing the accruals factor as a variable to proxy for such risks, this study demonstrates that the accruals factor is priced and can enhance existing asset pricing models. Moreover, categorizing accruals into discretionary and non-discretionary components and constructing accruals factors from these components yields similar results. When the discretion of managers or market environment increases the degree of asymmetric information, adverse selection problems become more pronounced. Therefore, the accruals factor, serving as a proxy for the systematic risk associated with adverse selection, is an essential risk factor in asset pricing models.