Purpose This paper aims to examine whether accumulated depreciation, an accounting figure typically disclosed in financial statement footnotes, conveys incremental information about managerial investment behavior and future firm performance. While prior research focuses on period-specific investment measures, accumulated depreciation reflects the cumulative outcomes of capital investment and asset retirement decisions. The study investigates whether investors fully incorporate this information when valuing firms and whether unusually low accumulated depreciation signals heightened investment risk and agency-related inefficiencies. Design/methodology/approach Using a large sample of US firms from 1993 to 2023, the study constructs accumulated depreciation scaled by long-term assets and examines its relation to future stock returns. The analysis uses portfolio sorts and multivariate regressions controlling for firm size, valuation ratios, abnormal capital investment, firm age, asset growth, leverage, momentum, earnings surprises and fixed effects. Additional tests examine operating outcomes, asset retirement behavior and earnings announcement reactions. Findings Firms with extremely low accumulated depreciation earn significantly lower future stock returns. A long–short strategy based on accumulated depreciation generates an annualized return of approximately 10.8%, driven by negative abnormal returns among low-depreciation firms. These firms subsequently exhibit aggressive but unprofitable expansion, higher costs, premature asset retirements and a greater likelihood of missing earnings forecasts. The results are robust to alternative explanations and established anomalies. Practical implications The findings suggest that accumulated depreciation provides a useful warning signal of value-destroying managerial behavior. Investors, analysts and regulators should pay closer attention to depreciation-related disclosures, particularly when they are relegated to footnotes. Firms with unusually low accumulated depreciation warrant heightened scrutiny due to their elevated risk of inefficient capital allocation and negative performance surprises. Originality/value This study identifies accumulated depreciation as a novel, cumulative accounting signal of managerial investment inefficiency. Unlike flow-based measures, it captures long-run outcomes of managerial decisions and highlights the valuation relevance of underutilized footnote disclosures. The paper contributes to accounting, finance and information processing literatures by demonstrating that disclosure location and cumulative accounting measures have material market implications.
Foong Soon Cheong (Tue,) studied this question.