The impact of accounting information quality on the mispricing of accruals: The case of FRS3 in the UK

We exploit a unique setting of accounting regulation change to examine how accounting information quality affects the well-documented accrual anomaly. We show a significant reduction in the negative return predictability of accruals among UK companies with poorer accounting information quality following the introduction of Financial Reporting Standard No. 3: Reporting Financial Performance (FRS3). While the functional fixation hypothesis attributes the mispricing of accruals to the judgemental error of endusers of information, our findings suggest that the supply side of information also plays a crucial role. Our results provide evidence that regulatory interventions seeking to improve accounting information quality can reduce the mispricing of securities in the capital market. 2009 Elsevier Inc. All rights reserved.