Weighing the Evidence on the Relation between External Corporate Financing Activities, Accruals and Stock Returns

Bradshaw, Richardson, and Sloan (BRS, 2006) develop a comprehensive measure of corporate financing activities, rather than focusing on individual categories of external financing, and find a negative relation between this measure and future stock returns and profitability. The authors interpret their findings as consistent with a misvaluation hypothesis. However, we show that once controlling for total accruals, the documented relation between external financing activities and future stock returns is not statistically significant. Incidentally, these findings are consistent with Richardson and Sloan (2003).