Abstract:
This study uses a mixed research design to evaluate the pricing effect
of accruals quality among public companies in Kenya. The study’s sample of
39 companies is purposively derived from a population of 60 companies and
covers the period January 1993 through December 2013. It relies on
secondary data on accruals information from annual financial statements and
monthly equity market security prices. Once estimated, accruals quality is
further split into its innate and discretionary components. Panel regression of
accruals-based portfolio decile premiums on the Fama and French (1993)
market pricing factors is used to test the statistical significance of the market
excess returns to establish whether and how accruals quality is priced in the
Kenyan securities market. The findings show that most of the accruals
quality comprises innate accruals quality and that level discretionary accruals
quality among listed companies in Kenya is statistically insignificant. They
further indicate that there exists accruals quality market return premium at
the Nairobi Securities Exchange (NSE) and that the security market returns
are inversely related with market returns. In essence, accruals quality is a
diversifiable information risk factor at the NSE. Since the conclusions are
based on the listed companies in Kenya only, the study recommends that the
pricing tests could be conducted on a wider scope of companies that includes
non-listed firms since these play a prominent economic role among the
developing countries.
