Market valuation of accrual components

Abstract

Purpose

The purpose of this paper is to generate empirical evidence that facilitates our understanding of the market pricing for cash flows and accruals.

Design/methodology/approach

The study is empirical in nature, and utilizes and archival methodology.

Findings

The evidence in this study supports the primary hypothesis that the market valuations for the receivable accrual are greater than the valuations for other current accruals. Additionally, the results suggest that market valuations for cash flows are not monotonically greater than the valuations for accruals.

Research limitations/implications

Overall, the results of this study suggest that inferences about the market's valuation of cash flows and accruals must consider multiple sources of variation in a concurrent fashion.

Practical implications

Models for equity valuation used by financial analysts, institutional investors, etc. should allow the various components of accruals to act independently.

Originality/value

This study contributes to the literature by synthesizing various aspects of capital markets research in accounting to enhance our understanding of the role that cash flows and accruals maintain for equity valuation.

Citation

Francis, R. (2008), "Market valuation of accrual components", Review of Accounting and Finance, Vol. 7 No. 2, pp. 150-166. https://doi.org/10.1108/14757700810874128