From Micro to Macro : Aggregate Accruals, Mergers, and Returns. A Discussion of Heater, Nallareddy and Venkatachalam (2021)

Heater, Nallareddy, and Venkatachalam (2021), hereafter HNV, find that aggregate merger and acquisition (M&A) activity explains the ability of aggregate accruals to predict market-wide returns. In this discussion, we delineate HNV’s contribution to accounting literature and provide a review of the emerging stream of micro-to-macro accounting research. We also discuss HNV’s findings in relation to research beyond accounting, including the literature on aggregate return prediction and mergers and acquisitions. Our discussion draws parallels between HNV’s results and prior empirical evidence pertaining to aggregate investment and merger waves and identifies several puzzling inconsistencies. These inconsistencies highlight the lack of a clearly specified mechanism behind the return-predictive ability of aggregate M&A accruals. Finally, we point out the challenges posed by the small sample size and noisy measures of M&A accruals that may affect HNV’s inferences. We conclude by suggesting several directions for future research