Revisiting the (Mis)Pricing of Accruals

2019 ◽  
Vol 4 (1) ◽  
pp. 141-156
Author(s):  
Bradley Lail ◽  
Robert C. Lipe ◽  
Han S. Yi
Keyword(s):  
Stock Returns ◽  
Null Hypothesis ◽  
Statistical Tests ◽  
Cash Flows ◽  
Data Availability ◽  
Investor Behavior ◽  
Reliability Measures ◽  
Accrual Anomaly ◽  
Earnings Components ◽  
Jel Classifications

Our paper examines inconsistent conclusions regarding the accrual anomaly and demonstrates the importance of aligning regression specifications with hypotheses. Richardson, Sloan, Soliman, and Tuna (2005) conclude that accruals are mispriced and the mispricing seems to increase as accrual reliability decreases. Barone and Magilke (2009) and Ball, Gerakos, Linnainmaa, and Nikolaev (2016) conclude that cash flows rather than accruals are mispriced. We show that the divergent conclusions come from misalignment between the null hypothesis and regression specification in Richardson et al. (2005) . In addition, analysis of the contemporaneous relations between stock returns and components of earnings supports an initial underreaction to cash flows by investors. We fail to detect links between the reliability measures in Richardson et al. (2005) and investor behavior once we align the statistical tests with the null hypothesis. Our reexamination of prior findings benefits accounting academics, standard setters, and others interested in how investors use earnings components. JEL Classifications: M41. Data Availability: All data used in this study are publicly available from the sources identified in the text.

Does the Ability of Operating Cash Flows to Measure Firm Performance Improve during Periods of Financial Distress?

2016 ◽  
Vol 31 (1) ◽  
pp. 23-35 ◽  
Author(s):  
Jong Eun Lee ◽  
Robson Glasscock ◽  
Myung Seok Park
Keyword(s):  
Firm Performance ◽  
Stock Returns ◽  
Shapley Value ◽  
Financial Distress ◽  
Cash Flows ◽  
Data Availability ◽  
Earnings Information ◽  
Operating Cash Flows ◽  
The Shapley Value ◽  
Jel Classifications

SYNOPSIS This study examines whether the associations between stock returns and earnings, and stock returns and cash flows from operations (OCF), vary during periods of firm-specific financial distress. We find that a firm's stock returns are more strongly associated with its OCF than its earnings when the firm is in financial distress. In a regression of stock returns on both OCF and earnings, and interactions of these two variables with an indicator for financial distress, the Shapley value, which measures contribution to the regression R2, is higher for the interaction of OCF with distress than for the interaction of earnings with distress. We also find that the strength of the observed return-OCF relation increases in a market-wide crisis. These findings support the view that investors, in times of firm distress, place significantly more weight on OCF information than on earnings information. JEL Classifications: G01; G10; M41. Data Availability: Data used in this study are available from public sources identified in the study.

Clawbacks and Earnings Management

2018 ◽  
Vol 31 (3) ◽  
pp. 129-151 ◽  
Author(s):  
Carolyn B. Levine ◽  
Michael J. Smith
Keyword(s):  
Numerical Analysis ◽  
Earnings Management ◽  
Cash Flows ◽  
Data Availability ◽  
Real Earnings Management ◽  
Interim Report ◽  
Short Term ◽  
Period Model ◽  
Jel Classifications

ABSTRACT This study addresses the effect of clawbacks on earnings management (EM). In a two-period model, the manager can report truthfully or distort an interim report using either accrual or real EM. The principal can make short-term payments based on a manipulable accounting signal and long-term payments based on unmanipulable cash flows. The strength of the clawbacks determines the likelihood that the manager's compensation is reclaimed when the interim report was managed. Stronger clawback provisions may result in (1) a substitution between accrual and real earnings management, or (2) earnings management when no earnings management was optimal with weak clawbacks, and (3) lower expected profits for the principal. Numerical analysis suggests that strong clawbacks do not reduce aggregate earnings management. JEL Classifications: J33; M48; M52; G38. Data Availability: All data are simulated.

scholarly journals The Relationship Between of Cash Flows (Financing, Investment and Operating) and Stock Prices, Size of the Firms

2020 ◽  
Vol 11 (5) ◽  
pp. 424
Author(s):  
Tamer Bahjat Sabri ◽  
Khalid Mohammad Hasan Sweis ◽  
Issam Naim Mahammad Ayyash ◽  
Yasmeen Faheem Asaad Qalalwi ◽  
Israa Sami Abbas Abdullah
Keyword(s):  
Stock Returns ◽  
Stock Prices ◽  
Null Hypothesis ◽  
Stock Exchange ◽  
Statistical Significance ◽  
Nonparametric Test ◽  
Cash Flows ◽  
The Other ◽  
Significant Difference ◽  
The Relationship

This study sought to test the relationship between cash flows from operating activities, investment activities and financial activities and on one hand and stock returns and the volume of assets on the companies listed in Palestine Stock Exchange on the other hand. The study incorporated 24 companies in 2018 and the required data were obtained through the financial statements. To test the hypotheses of the study, the Mann-Whitny U Test was used, a nonparametric test. Also the Kolmogorov-Smirnov was done. The findings demonstrated that the value of the Whitny U Test was (-3.291) Z with a statistical significance at 1%. Based on this, the null hypothesis was rejected and the alternative one, stating that there is a statistically significant difference between the operating flows of companies with low assets and those companies with high assets, was accepted. However, the other null hypothesis was accepted. The study recommended that companies and investors should take into consideration cash flows when taking an investment decision in Palestine Stock Exchange.

Tangible Long-Lived Asset Impairments and Future Operating Cash Flows under U.S. GAAP and IFRS

2017 ◽  
Vol 93 (1) ◽  
pp. 187-211 ◽  
Author(s):  
Elizabeth A. Gordon ◽  
Hsiao-Tang Hsu
Keyword(s):  
Predictive Value ◽  
Cash Flows ◽  
Negative Association ◽  
Data Availability ◽  
Economic Factors ◽  
Negatively Associated ◽  
Operating Cash Flows ◽  
Reporting Incentives ◽  
Asset Impairments ◽  
Jel Classifications

ABSTRACT This paper investigates the predictive value of tangible long-lived asset impairments for changes in future operating cash flows under U.S. GAAP and IFRS. We find that impairments reported under IFRS are negatively associated with changes in future operating cash flows, whereas those under U.S. GAAP, on average, are not. We investigate whether differences in the predictive value are attributable to differences in recognition or measurement, providing evidence suggesting that impairment recognition under U.S. GAAP is delayed. Evidence also suggests that the value-in-use measurement attribute, allowed under IFRS, does not induce under-impairing as IFRS and U.S. GAAP impairments are similarly related to future impairments. The main result of a negative association under IFRS, but not U.S. GAAP, holds after considering future impairments to control for measurement differences, macro-economic factors, and firm reporting incentives. Further, impairment losses under IFRS are more predictive in high-enforcement countries. JEL Classifications: D78; F02; M16; M41; G38. Data Availability: Data used are available from sources identified in the paper.

An Analysis of “Little r” Restatements

2015 ◽  
Vol 29 (3) ◽  
pp. 667-693 ◽  
Author(s):  
Christine E. L. Tan ◽  
Susan M. Young
Keyword(s):  
Corporate Governance ◽  
Audit Quality ◽  
Cash Flows ◽  
Internal Controls ◽  
Data Availability ◽  
Policy Implications ◽  
Multivariate Tests ◽  
Material Weaknesses ◽  
Free Cash Flows ◽  
Jel Classifications

SYNOPSIS “Little r” restatements occur when a firm's immaterial errors accumulate to a material error in a given year. Unlike “Big R” restatements that must be reported through an SEC 8-K material event filing, little r restatements do not require an 8-K form or a withdrawal of the auditor opinion. This paper documents this previously unexamined form of restatement and analyzes the characteristics of the firms that have used this method of correcting accounting errors over the period 2009 through 2012. Contrary to concerns voiced by regulators and research agencies we find, in multivariate tests, that little r firms are generally more profitable, less complex, and show some evidence of stronger corporate governance and higher audit quality than Big R firms. Compared to non-revising or restating firms, little r firms have lower free cash flows, higher board expertise, higher CFO tenure, are less likely to use a specialist auditor, and less likely to have material weaknesses in their internal controls. We also find that the majority of little r firms do not include any discussion of why these little r's occurred. We discuss policy implications related to disclosure of little r revisions. JEL Classifications: M41; M48; G38. Data Availability: All data used in this study are publicly available from the sources indicated.

Firm-Specific Estimates of Differential Persistence and their Incremental Usefulness for Forecasting and Valuation

2015 ◽  
Vol 91 (3) ◽  
pp. 811-833 ◽  
Author(s):  
Andrew C. Call ◽  
Max Hewitt ◽  
Terry Shevlin ◽  
Teri Lombardi Yohn
Keyword(s):  
State Of The Art ◽  
Cash Flows ◽  
Trading Strategies ◽  
Significant Excess ◽  
Lower Growth ◽  
Cross Sectional ◽  
Operating Cash Flows ◽  
Earnings Components ◽  
Out Of Sample ◽  
Jel Classifications

ABSTRACT Although the differential persistence of accruals and operating cash flows is a firm-specific phenomenon, research seeking to exploit the differential persistence of these earnings components typically employs cross-sectional forecasting models. We find that a model based on firm-specific estimates of the differential persistence of accruals and operating cash flows is incrementally useful for out-of-sample forecasting relative to state-of-the-art cross-sectional models. In doing so, we show that firm-specific estimates of differential persistence are particularly useful when forecasting earnings for more stable firms (e.g., more profitable, lower growth, and less levered firms). We also demonstrate that a trading strategy exploiting investors' fixation on earnings and based on firm-specific estimates of differential persistence earns statistically and economically significant excess returns that are incremental to those generated by trading strategies based on the size of accruals. These results suggest that firm-specific estimates of differential persistence are incrementally informative for forecasting and valuation. JEL Classifications: M41.

Analysts, Taxes, and the Information Environment

2019 ◽  
Vol 42 (1) ◽  
pp. 103-131 ◽  
Author(s):  
Sangwan Kim ◽  
Andrew P. Schmidt ◽  
Kelly Wentland
Keyword(s):  
Accounting Information ◽  
Earnings Forecasts ◽  
Information Environment ◽  
Data Availability ◽  
Forecast Errors ◽  
Complete Understanding ◽  
The Public ◽  
Earnings Information ◽  
Earnings Components ◽  
Jel Classifications

ABSTRACT This paper investigates the extent to which analysts incorporate tax-based earnings information into their earnings forecasts relative to other earnings information. We find that analysts' misreaction to tax-based earnings information is distinct from their misreaction to other (nontax) accounting information, on average. We then show that analysts differ in their misestimation of tax and other (nontax) earnings components only when firms have weak information environments; when firms have strong information environments, analysts' forecasts fully incorporate tax-based earnings information and exhibit no difference incorporating tax-based earnings information relative to other accounting information. Our evidence suggests that, on average, forecasting tax-based earnings information is more difficult for analysts relative to forecasting other accounting information. However, access to appropriate information and resources enables analysts to better process tax information. Overall, we contribute to the literature by providing a more complete understanding of the source of analysts' tax-related forecast errors. JEL Classifications: H25; M41; D82; G14. Data Availability: Data are available from the public sources identified in the text.

Do PCAOB Inspections Improve Working Capital Accrual Reliability? Evidence from the PCAOB Annual versus Triennial Inspection Exposure

2020 ◽  
Vol 34 (2) ◽  
pp. 147-166 ◽  
Author(s):  
Cheol Lee ◽  
Jong Eun Lee ◽  
Myung Seok Park
Keyword(s):  
Cash Flow ◽  
Cash Flows ◽  
Data Availability ◽  
Earnings Persistence ◽  
Working Capital ◽  
Improve Working ◽  
Future Earnings ◽  
Public Company ◽  
Jel Classifications ◽  
Better Than

SYNOPSIS In this study, we examine whether the ability of working capital (WC) accruals to predict future earnings and cash flows differs between registrants whose auditors are subject to annual Public Company Accounting Oversight Board (PCAOB) inspections and those whose auditors are subject to triennial PCAOB inspections. We find that WC accruals of clients audited by auditors subject to annual PCAOB inspections enhance earnings persistence more and map into future cash flow realizations better than those audited by auditors subject to triennial PCAOB inspections. These findings are stronger for operating asset accruals than for operating liability accruals. Furthermore, after PCAOB inspection reports are released, improvements in WC accrual reliability are more evident for clients audited by annually inspected auditors than for clients audited by triennially inspected auditors. Overall, our findings suggest that more frequent PCAOB inspections help to improve WC accrual reliability. JEL Classifications: M41; M42; M48. Data Availability: The data are publicly available from the sources identified in the paper.

scholarly journals Asymmetrically Timely Loss Recognition and the Accrual Anomaly: Evidence From Pakistan’s Non-financial Sectors

2020 ◽  
Vol 10 (3) ◽  
pp. 1
Author(s):  
Amna Asim ◽  
Danish Ahmed Siddiqui
Keyword(s):  
Stock Returns ◽  
Stock Exchange ◽  
Research Result ◽  
Negative Relationship ◽  
Cash Flows ◽  
Accrual Anomaly ◽  
Indicator Variable ◽  
Financial Firms ◽  
Conditional Conservatism ◽  
Timely Loss Recognition

An important role of Conditional conservatism is to align the timely expense recognition of revenue generated in terms of losses compared 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 aim of this study to determine the asymmetric timely loss recognition and accrual anomaly of the non-financial firms listed at Pakistan Stock exchange (PSX). Top volume non-financial firms listed at PSX were taken for this study over a period of 2011 to 2018. The direct implication of this research on the pattern of pricing of accrual component of earning exhibits positive relationship of excess returns with accruals and stock returns; whereas negative relationship with earnings, market capitalization and indicator variable of profit firms. Overall, research result is consistent with Konstantinidi et al. (2015), the 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. 

Accounting Adjustments and the Valuation of Financial Statement Note Information in 10-K Filings

2011 ◽  
Vol 86 (5) ◽  
pp. 1577-1604 ◽  
Author(s):  
Gus De Franco ◽  
M. H. Franco Wong ◽  
Yibin Zhou
Keyword(s):  
Stock Returns ◽  
Stock Prices ◽  
Data Availability ◽  
Financial Statement ◽  
Target Price ◽  
Equity Analysts ◽  
Jel Classifications

ABSTRACT We examine the valuation of financial statement note information at the time of 10-K filings. We find that stock returns around 10-K filings are positively related to accounting adjustments calculated from financial statement note information. We further document that the likelihood of equity analysts issuing a report and updating their target price estimates at the 10-K dates is increasing in the magnitude of the adjustments. Those analysts who do update their target prices at this time revise their estimates consistent with the sign and magnitude of the adjustments. These findings are consistent with financial statement users utilizing financial statement note information to make accounting adjustments, thereby incorporating this information into stock prices. JEL Classifications: G14, G29, M40, M41, M44. Data Availability: All data are publicly available from the sources identified in the article.

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