Asymmetric Persistence and the Market Pricing of Accruals and Cash Flows PDF Download
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Author: Theodosia Konstantinidi
Publisher:
ISBN:
Category :
Languages : en
Pages : 32
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Book Description
We investigate whether stock prices reflect the asymmetric persistence of accruals and cash flows resulting from conditional conservatism. Using the Mishkin (1983) test (MT), we provide further evidence on the earnings fixation explanation for the accrual anomaly. We also apply panel estimation techniques that significantly affect market efficiency inferences. Our results suggest that over our sample period (1) investors seem to partially anticipate asymmetric persistence in accruals and cash flows; (2) the accrual anomaly originates in the mispricing of accruals in years of economic gains, even though the differential persistence between accruals and cash flows is greatest in years of economic losses; (3) investors respond differently to accrual and cash flow surprises and therefore they do not naively fixate on earnings surprises; and (4) after clustering standard errors in the MT by firm and year dimensions, there is no longer evidence of cash flow mispricing, while the statistical significance of accrual mispricing falls. All our findings contradict the earnings fixation explanation for the accrual anomaly. Our study has implications for understanding the accrual anomaly in relation to accrual dynamics, as well as for researchers interested in using the MT framework to test the rationality of investor expectations more generally.
Author: Theodosia Konstantinidi
Publisher:
ISBN:
Category :
Languages : en
Pages : 32
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Book Description
We investigate whether stock prices reflect the asymmetric persistence of accruals and cash flows resulting from conditional conservatism. Using the Mishkin (1983) test (MT), we provide further evidence on the earnings fixation explanation for the accrual anomaly. We also apply panel estimation techniques that significantly affect market efficiency inferences. Our results suggest that over our sample period (1) investors seem to partially anticipate asymmetric persistence in accruals and cash flows; (2) the accrual anomaly originates in the mispricing of accruals in years of economic gains, even though the differential persistence between accruals and cash flows is greatest in years of economic losses; (3) investors respond differently to accrual and cash flow surprises and therefore they do not naively fixate on earnings surprises; and (4) after clustering standard errors in the MT by firm and year dimensions, there is no longer evidence of cash flow mispricing, while the statistical significance of accrual mispricing falls. All our findings contradict the earnings fixation explanation for the accrual anomaly. Our study has implications for understanding the accrual anomaly in relation to accrual dynamics, as well as for researchers interested in using the MT framework to test the rationality of investor expectations more generally.
Author: Michelle Lee Hanlon
Publisher:
ISBN:
Category : Corporations
Languages : en
Pages : 130
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Book Description
Author: Kai Wai Hui
Publisher:
ISBN:
Category :
Languages : en
Pages : 46
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Book Description
Economic theory suggests that the industry-wide component of firm performance is more persistent than the firm-specific component. This paper provides evidence on this assertion and tests whether investors misprice these components of earnings. Consistent with predictions, we find greater persistence in the industry-wide component of earnings that is not fully recognized in stock prices. We show that these effects are partially driven by the market's inability to recognize the differential persistence of industry-wide earnings in homogenous industries or in the presence of a large business shock. Finally, we show that industry-wide cash flows is the most persistent component of earnings while firm-specific accruals is the least persistent, suggesting that economic fundamentals and accounting constructs are jointly informative about firms' future earnings. The market predictably misprices these components, however, significantly underweighting the persistence of industry-wide cash flows and overweighting the persistence of firm-specific accruals.
Author: Logan B. Steele
Publisher:
ISBN:
Category :
Languages : en
Pages : 144
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Book Description
I examine why operating cash flows exhibit asymmetric timeliness with respect to stock returns and given this understanding, address the consequences for research into conditional accounting conservatism. Numerous studies document that operating cash flows are more sensitive to negative stock returns relative to positive returns. Because the properties of cash flows are defined largely by the operating (rather than reporting) decisions taken by management, the asymmetric relation with returns cannot be explained by conditional conservatism. I find that the asymmetric timeliness of cash flows is primarily driven by product pricing, whereby managers are quick to cut prices in response to bad economic news, but do not appear to increase prices in response to good economic news. Consistent with this reasoning, I find that firms with greater pricing power exhibit lower asymmetric timeliness in operating cash flows as well as in earnings. Variation in the asymmetric timeliness of earnings induced by operating cash flows should not be interpreted as evidence of conditional conservatism. With this in mind, I revisit several existing inferences regarding conditional conservatism. I conclude that researchers should employ a specification of the Basu 1997 model that (1) avoids the confounding effect of cash flow asymmetry and (2) addresses the matching role of accruals.
Author: Augusto Cezar Silva Filho
Publisher:
ISBN:
Category :
Languages : en
Pages : 19
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Book Description
The main objective in this research is to analyze the persistence and relevance of accruals, as well as the existence of the accrual anomaly in the Brazilian capital market. Therefore, this study is conducted by three research hypotheses: (i) the accruals are less persistent than the cash flows in the explanation of future earnings; (ii) the market does not correctly recognize the information contained in the accruals; and (iii) extraordinary gains can be obtained when using the magnitude of the accrual levels as an investment strategy. The population included all non-financial companies traded on the São Paulo Stock Exchange (BMF&BOVESPA) between January 1st 1995 and December 31st 2011. The results indicated that the estimated coefficient of the accrual persistence was lower than the cash flow coefficient, thus sustaining the first research hypothesis. In the second part of the research, it was verified that the market correctly prices the accrual component of earnings, as a positive and statistically significant relation exists between accruals and future stock returns, which was not expected. Finally, the results found in the third hypothesis sustain the non-existence of the accrual anomaly in the Brazilian market, as the hedge portfolios were positive in only five out of 15 years under analysis. The results obtained in this study can encourage the establishment of policies to reduce the information asymmetry, making the improper transfer of wealth to companies with a low earnings quality impossible.
Author: James M. Wahlen
Publisher: Cengage Learning
ISBN: 9780324789416
Category : Business & Economics
Languages : en
Pages : 1296
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Book Description
Wahlen/Baginski/Bradshaw is a balanced, flexible, and complete Financial Statement Analysis book that is written with the premise that students learn financial statement analysis most effectively by performing the analysis on actual companies. Students learn to integrate the concepts from economics, finance, business strategy, accounting, and other business disciplines through the integration of a unique six-step process. Important Notice: Media content referenced within the product description or the product text may not be available in the ebook version.
Author: Patricia M. Fairfield
Publisher:
ISBN:
Category :
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.
Author: Amna Asim
Publisher:
ISBN:
Category :
Languages : en
Pages : 71
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Book Description
An important role of Conditional conservatism is to align the timely expense recognition of revenue generated in terms of losses comparative to the profit over negative components of accruals. Accrual anomaly shows asymmetric differential persistence for accruals and cash flows in years of economic gains rather than losses. The direct implication of this research on the pattern of pricing of accruals component of earning exhibits positive relationship of excess returns with accruals and stock returns whereas the negative relationship with earnings, market capitalization, and indicator variable of profit firms. Overall, the research result is consistent with Konstantinidi et al. (2015), accrual effect on stock return is existent for earnings generated firms while not apparent for loss firms. This evidence provides relevant information on the aspects of accrual anomaly and its association with the variables of conditional conservatism on the pricing of accrual during the profit years.
Author: Leonard Zacks
Publisher: John Wiley & Sons
ISBN: 1118127765
Category : Business & Economics
Languages : en
Pages : 352
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Book Description
Investment pioneer Len Zacks presents the latest academic research on how to beat the market using equity anomalies The Handbook of Equity Market Anomalies organizes and summarizes research carried out by hundreds of finance and accounting professors over the last twenty years to identify and measure equity market inefficiencies and provides self-directed individual investors with a framework for incorporating the results of this research into their own investment processes. Edited by Len Zacks, CEO of Zacks Investment Research, and written by leading professors who have performed groundbreaking research on specific anomalies, this book succinctly summarizes the most important anomalies that savvy investors have used for decades to beat the market. Some of the anomalies addressed include the accrual anomaly, net stock anomalies, fundamental anomalies, estimate revisions, changes in and levels of broker recommendations, earnings-per-share surprises, insider trading, price momentum and technical analysis, value and size anomalies, and several seasonal anomalies. This reliable resource also provides insights on how to best use the various anomalies in both market neutral and in long investor portfolios. A treasure trove of investment research and wisdom, the book will save you literally thousands of hours by distilling the essence of twenty years of academic research into eleven clear chapters and providing the framework and conviction to develop market-beating strategies. Strips the academic jargon from the research and highlights the actual returns generated by the anomalies, and documented in the academic literature Provides a theoretical framework within which to understand the concepts of risk adjusted returns and market inefficiencies Anomalies are selected by Len Zacks, a pioneer in the field of investing As the founder of Zacks Investment Research, Len Zacks pioneered the concept of the earnings-per-share surprise in 1982 and developed the Zacks Rank, one of the first anomaly-based stock selection tools. Today, his firm manages U.S. equities for individual and institutional investors and provides investment software and investment data to all types of investors. Now, with his new book, he shows you what it takes to build a quant process to outperform an index based on academically documented market inefficiencies and anomalies.
Author: Jennifer Francis
Publisher: Now Publishers Inc
ISBN: 1601981147
Category : Business & Economics
Languages : en
Pages : 97
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Book Description
This review lays out a research perspective on earnings quality. We provide an overview of alternative definitions and measures of earnings quality and a discussion of research design choices encountered in earnings quality research. Throughout, we focus on a capital markets setting, as opposed, for example, to a contracting or stewardship setting. Our reason for this choice stems from the view that the capital market uses of accounting information are fundamental, in the sense of providing a basis for other uses, such as stewardship. Because resource allocations are ex ante decisions while contracting/stewardship assessments are ex post evaluations of outcomes, evidence on whether, how and to what degree earnings quality influences capital market resource allocation decisions is fundamental to understanding why and how accounting matters to investors and others, including those charged with stewardship responsibilities. Demonstrating a link between earnings quality and, for example, the costs of equity and debt capital implies a basic economic role in capital allocation decisions for accounting information; this role has only recently been documented in the accounting literature. We focus on how the precision of financial information in capturing one or more underlying valuation-relevant constructs affects the assessment and use of that information by capital market participants. We emphasize that the choice of constructs to be measured is typically contextual. Our main focus is on the precision of earnings, which we view as a summary indicator of the overall quality of financial reporting. Our intent in discussing research that evaluates the capital market effects of earnings quality is both to stimulate further research in this area and to encourage research on related topics, including, for example, the role of earnings quality in contracting and stewardship.
