Naive Investor Hypothesis Application in Jordan

Abstract

When it comes to the manipulation of earnings the use of accounting accruals is preferred because it maximizes incentives. A study sample consisting of 44 industrial companies, listed in Amman Stock Exchange during the period (2004-2011), examining the five models of the study’s hypotheses is done using Regression analysis to present the relationship between accruals, risks and stock prices. The incremental information content for the variables was obtained using (Adjusted-R²) and found the following results: Future profitability in Jordanian companies can't be predicted by stock market prices, and; accruals have incremental information content when predicting future profitability relative to stock market prices and profitability. Lastly, naive investor hypothesis is tested and the findings indicate that there is a relationship between bankruptcy and systematic risks in one side and accruals in the other.

Keywords: Accruals, Abnormal Accruals, naive investor hypothesis, Financial Risks, Stock prices.