Do Accounting Information and Market Environment Matter for Cross-Asset Predictability?

This paper examines whether the differences in accounting information between stocks affect cross-asset return predictability. We use a comprehensive set of accounting variables and find that abnormal accruals, earnings smoothness, book-to-market, firm age, leverage, abnormal capital investment, and investment growth, among others, explain the variation in return predictability across pairing stocks. Moreover, our results show that cross-asset predictability varies over time and is associated with funding liquidity and market sentiment. A simple trading strategy based on our findings yields a higher mean return, lower standard deviation, and higher Sharpe ratio compared to the buy-and-hold strategy.