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Author: George A. Papanastasopoulos
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Languages : en
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Book Description
We investigate the accrual anomaly, conditional on the mandatory adoption of Financial Reporting Standard No. 3: Reporting Financial Performance (FRS3) by UK firms. We show that return predictability associated with accruals attributable to accounting distortions is largely attenuated and not statistically significant at conventional levels, after the introduction of FRS3. In contrary, the predictive ability of accruals attributable to growth for future returns is not substantially affected and remains strong in magnitude from the pre-FRS3 to the post-FRS3 periods. As a consequence, total accruals continue to predict returns following FRS3. Overall, our findings are broadly consistent with increased accounting disclosure and investor protection eliminating inefficiencies and promoting accurate share prices in the capital market.
Author: George A. Papanastasopoulos
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Languages : en
Pages :
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Book Description
We investigate the accrual anomaly, conditional on the mandatory adoption of Financial Reporting Standard No. 3: Reporting Financial Performance (FRS3) by UK firms. We show that return predictability associated with accruals attributable to accounting distortions is largely attenuated and not statistically significant at conventional levels, after the introduction of FRS3. In contrary, the predictive ability of accruals attributable to growth for future returns is not substantially affected and remains strong in magnitude from the pre-FRS3 to the post-FRS3 periods. As a consequence, total accruals continue to predict returns following FRS3. Overall, our findings are broadly consistent with increased accounting disclosure and investor protection eliminating inefficiencies and promoting accurate share prices in the capital market.
Author: Leonidas C. Doukakis
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Languages : en
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On the basis of an accrual decomposition into two components capturing output growth and accounting distortions, this paper analyzes the effects of accounting accruals on firms' future performance in the U.K. stock market. Findings reveal a strong negative association of accruals with future profitability and stock returns. The effect of accruals on future earnings performance is driven only by the component attributable to accounting distortions, and the accrual effect on stock price performance is driven by both the component attributable to accounting distortions and the component attributable to growth. These two components complement each other in driving the accrual effect on stock returns.
Author: Scott A. Richardson
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Languages : en
Pages : 53
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Book Description
Following Sloan (1996), numerous studies show that the accrual component of earnings is less persistent than the cash flow component of earnings. Disagreement exists, however, as to the explanation for this result. Xie (2001) attributes the result to managerial discretion. Fairfield et al. (2003a) argue that it is a special case of a more general growth anomaly that is attributable to the widespread use of conservative accounting methods and/or diminishing marginal returns to new investment. Finally, Dechow and Dichev (2002) and Richardson et al. (2004) argue that it is attributable to transitory accrual estimation error. In this paper, we provide theory and evidence to discriminate between these alternative explanations. Our analysis suggests that transitory accrual estimation error provides the most consistent explanation for the lower persistence of the accrual component of earnings. Further, our results suggest the accrual estimation error is at least partially attributable to managerial discretion.
Author: Roger C. Graham
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Languages : en
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This study examines the effect of the Sarbanes-Oxley Act of 2002 (SOX) on accounting distortions in the context of the earnings quality of high-growth firms relative to lower-growth firms. High-growth creates unique management and reporting challenges that can contribute to accounting-related distortions. SOX, with its emphasis on financial reporting, control systems, and management responsibility could have been particularly relevant for high-growth firms with such challenges. Test results indicate a stronger reduction (weaker increase) in accounting distortions related to total accruals and book-tax differences (performance-matched modified Jones discretionary accruals) for high-growth firms from the pre- to the post-SOX period relative to lower-growth firms. Other tests indicate that the relation between accounting returns and market returns strengthened for high-growth firms in the period after SOX, but not for lower-growth firms. These results suggest greater reductions in accounting distortions and related improvements in reporting quality for high-growth firms relative to other firms coinciding with the post-SOX period.
Author: George A. Papanastasopoulos
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Languages : en
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Numerous studies claim that the accrual anomaly in the U.S. stock market is due mostly to temporary accounting distortions arising from accrual accounting. We examine the validity of this explanation in an international setting. Across the 15 developed European equity markets we examine, accounting distortions contribute to the negative relation between accruals and future earnings performance in 14 equity markets. Further, we show that the negative relation between accruals and stock returns could be at least attributable to accounting distortions. In particular, accruals related to accounting distortions predict returns in 7 out of the 9 markets where the accrual anomaly occurs in Europe. Finally, we show that the impact of accounting distortions on the pricing of the accrual component of earnings is stronger in markets with a higher level of trust and a lower level of secrecy.
Author: Konan Chan
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Languages : en
Pages : 38
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Book Description
An exclusive focus on bottom-line income misses important information about the quality of earnings. Accruals (the difference between accounting earnings and cash flows) are reliably, negatively associated with future stock returns. Earnings increases that accompanied by high accruals, suggesting low-quality earnings, are associated with poor future returns. We explore various hypotheses - earnings manipulation, extrapolative biases about future growth, and under-reaction to business conditions - to explain accruals' predictive power. Distinctions between the hypotheses are based on evidence from operating performance, the behavior of individual accrual items, and discretionary versus nondiscretionary components of accruals.
Author: Jenny Chu
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Languages : en
Pages : 130
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The current debate in the literature about whether growth drives accruals is inconclusive because accruals and growth proxies are positively correlated, and most growth proxies are accruals-based. This study first demonstrates that the implications of accruals for future firm performance are not subsumed by the non-accruals-based employee growth in a regression setting. Then I identify a subset of firms for which economic conditions cause accruals to not capture growth, thus providing a discriminating test. Specifically, I focus on firms with negative operating cycles and non-cash net working capital balances. These firms typically have declining net working capital as they grow because their business models result in current liabilities increasing more than current assets. In this setting, higher growth firms tend to have more negative accruals. Contrary to the growth hypothesis, high growth firms with low accruals experience high future profitability and returns. These findings indicate that accounting distortions embedded in accruals have distinct implications for future firm performance.
Author: George A. Papanastasopoulos
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Languages : en
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Book Description
In this paper, I show a generalization of the negative relation of traditional accruals and percent accruals with future returns in 11 of 16 European countries. Positive abnormal returns from hedge portfolios on both accrual measures summarize the economic significance of this generalization. The magnitude of returns obtained from traditional accruals is higher than that obtained from percent accruals, contrary to existing evidence from the U.S. capital market. The magnitude of the accrual effect on stock returns based on both accrual measures is stronger in countries with higher individualism, lower uncertainty avoidance, higher equity-market development, higher equity-market liquidity, lower transaction costs, higher analyst coverage, lower analyst optimism, and lower ownership concentration. In markets where minorities have legal protection against expropriation by corporate insiders and where accrual accounting is permitted, the accrual effect based only on percent accruals is positive. Earnings opacity does not appear to exhibit a significant influence. Overall, the evidence suggests that cross-country differences in culture, equity-market setting, analysts' research output, investor protection, and ownership structure play an important role in explaining variation on the magnitude of the accrual anomaly in Europe.
Author: Xiumin Martin
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Languages : en
Pages : 0
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This paper investigates two competing arguments for the lower persistence of accruals in an inter-temporal setting and their implications for accrual anomaly. The accounting distortions argument predicts a lower persistence of both accruals and growth in long-term net operating assets during periods of expansion than during recession. If investors fixate on earnings, then it predicts more mispricing of both accruals and growth in long-term net operating assets during expansionary periods relative to recessionary periods. In contrast, the growth argument predicts a lower persistence of accruals, but a higher persistence of growth in long-term net operating assets during expansions than during recessions. If investors are unable to access the effect of growth on future profitability, it predicts more (less) accrual (growth in long-term net operating assets) mispricing. Using a U.S. sample from 1972 to 2003, I find evidence consistent with the growth argument that during periods of expansion, the persistence of accruals is lower, but the persistence of growth in long-term net operating assets is higher. Additionally I find that the accrual mispricing is more pronounced, but the mispricing of growth in long-term net operating assets is less pronounced during periods of expansion.
Author: Patricia M. Fairfield
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Languages : en
Pages : 32
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Book Description
An important goal of accounting research is to provide evidence that improves the analysis of financial statements for predicting future profitability. Research (Sloan 1996; Xie 2001) has found that (1) the persistence of earnings performance depends on the proportions of the cash and accrual components and that (2) a market inefficiency results from the failure of investors to fully appreciate the implications of cash flows and accruals for future earnings performance. In this study we investigate whether these results with respect to accruals can be generalized to another form of growth in net operating assets. We find that growth in long-term net operating assets, like accruals, has a negative association with one-year-ahead return on assets. We also find that the negative associations of both forms of growth (accruals and growth in long-term net operating assets) to one-year-ahead return on assets are attributable to the effect of growth on the denominator of return on assets. Furthermore, we find that the apparent market mispricing of accruals applies to growth in long-term net operating assets and that the severity of the mispricing does not significantly differ between the components of growth. Thus, the results suggest that the accrual anomaly documented in Sloan (1996) is a subset of a larger anomaly with respect to a general market mispricing of growth in net operating assets. Statement Analysis, Market Mispricing.
