Restructuring Charges, FAS 146, and the Accrual Anomaly

In this study, we examine the role of restructuring charges in the existence and subsequent weakening of the widely documented accrual anomaly. We find that prior to 2003, the significant positive abnormal hedge returns experienced by accrual based strategies were influenced by a subset of firms with high restructuring charges. After 2003, with the introduction of the Statement of Financial Accounting Standards No. 146 changing the accounting for restructuring charges, restructuring firms no longer experience significant abnormal returns, thereby weakening the accrual anomaly. Our results suggest that the regulatory changes have had an effect on impairing the role of restructuring charges in the accrual anomaly by improving the market’s ability to correctly assess the valuation implications of restructuring charges in the low accruals portfolios. This paper was accepted by Mary Barth, accounting.