We develop a profile of overvalued equity, and show that firms meeting this profile experience abnormal stock returns net of transaction costs of -22 to -25 percent over the twelve months following portfolio formation. We show our model is distinct from predictors proposed in prior work, and our...

Although financial reporting fraud generates considerable losses, we find that investors do not fully exploit publicly available information relevant for detecting fraud. We show that firms with a high probability of overstated earnings have lower future earnings, less persistent...

The paper provides evidence that the relation between accruals and future returns is not symmetric. We find that firms with low accruals generate insignificant abnormal returns in asset pricing regressions that control for either earnings quality or operating volatility. In contrast, we find...

The paper examines the relation between the probability of manipulation, accruals, and future returns. We show that firms that have a high likelihood of earnings manipulation (as measured by the Beneish (1999)'s M-Score) experience lower future earnings, but that investors expect these firms to...

An accounting-based earnings manipulation detection model has strong out-of-sample power to predict cross-sectional returns. Companies with a higher probability of manipulation (M-score) earn lower returns on every decile portfolio sorted by size, book-to-market, momentum, accruals, and short...

An earnings manipulation detection model based on forensic accounting principles (Beneish 1999) has substantial out-of-sample ability to predict cross-sectional returns. We show that the model correctly identified, ahead of time, 12 of the 17 highest profile fraud cases in the period 1998-2002....