Search results

This study examines the effect of stock liquidity on the magnitude of the accrual anomaly.

This paper examines the relation—both time-series and cross-sectional—between stock liquidity and the magnitude of the accrual anomaly and use the 2001 minimum tick size decimalization as a quasi-experiment to establish causality.

There is both cross-sectional and time-series evidence that stock liquidity is negatively related to the magnitude of the accrual anomaly. Moreover, the extent to which investors overestimate the persistence of accruals decreases with stock liquidity. Results from a difference-in-differences analysis conducted using the 2001 minimum tick size decimalization as a quasi-experiment suggest that the effect of stock liquidity on the accrual anomaly is causal. The findings of this study are consistent with the enhancing effect of stock liquidity on pricing efficiency.

The study's findings are well aligned with the mispricing-based explanation for the accrual anomaly, suggesting that the improvement in market-wide stock liquidity drives the contemporaneous decline in the magnitude of the accrual anomaly, at least to a great extent.

This paper investigates the presence of the accrual and the cash flow anomalies in the New Zealand stock market for the period of 1987 to 2003. We observe insignificant evidence of the accrual anomaly but find strong evidence of the presence of the cash flow anomaly. However, from 1987 to 1992 – a period before the introduction of the Companies and the Financial Reporting Acts 1993 – the presence of the accrual anomaly was statistically significant suggesting that the introduction of the FRA had a significant impact on the occurrence of the anomaly. We observe further that firms with high discretionary accruals experience significant negative future stock returns. This evidence is consistent with the notion that managers of these firms engage in earnings management.

The purpose of the study is to investigate the possible role of annual report readability in accrual anomaly, shedding light on why investors fail to incorporate accruals information in a timely and unbiased manner beyond the original naive investor fixation explanation.

Using five proxies of annual report readability and available data over 1993–2017, we investigate whether accrual overpricing is more severe when annual reports are less readable.

We find little (substantive) evidence of accrual overpricing among high (low) readability firms. The readability effects are contingent on the level of business complexity and earnings management.

This study extends the original naive investor fixation explanation and documents annual report complexity as a market friction in explaining the accrual anomaly, contributing to the mispricing vs risk debate and supporting the efficient market hypothesis.

Low readability of annual reports is a red flag to investors.

This study provides support for regulatory initiatives aimed at enhancing readability of corporate disclosures to address market frictions and improve market efficiency.

Accrual anomaly has posed a challenge to the efficient market hypothesis. This study draws on and adds to the line of research indicating that annual report complexity is a friction erecting a barrier to transparency, hindering market efficiency. This study contributes to our understanding of the enigmatic accrual anomaly.

The purpose of this paper is to examine whether investors’ sentiment affects accruals anomaly across European countries.

The authors estimate the model using Fama–MacBeth regressions. The sample includes 54,572 firm-year observations for 4,787 European firms during the period 1994–2014.

The authors find that investors’ sentiment influences accruals mispricing across European countries. The effect is pronounced for stocks whose valuations are highly subjective and difficult to arbitrage. The cross-country analysis provides evidence that sentiment influences accruals anomaly in countries with weaker outside shareholder rights, lower legal enforcement, lower equity market development, higher allowance of accrual accounting and in countries where herd-like behavior and overreaction behavior are strong.

The findings suggest the generalizability of the sentiment-accruals anomaly relation in European countries characterized by different cultural values, levels of economic development and legal tradition.

The findings suggest to caution individuals investors. These investors would be wise to take into account the impact of sentiment on the performance of their portfolio. They must keep in mind that periods of high optimism are accompanied by a high level of accruals and followed by low future stock returns.

The research supplements previous American studies by showing the significance of the level of sentiment in understanding the accruals anomaly in Europe. Hence, it is important for future studies to consider investor sentiment as an important time-series determinant of the accruals anomaly, particularly for stocks that are hard to value and difficult to arbitrage.

This study is primarily motivated by the increasing concern of the academic, practitioners, regulators and standard setters regarding the quality of earnings and financial reporting. The purpose is to investigate whether the accrual anomaly exists in Australia; whether the occurrence of the accrual anomaly is attributed to the discretionary accruals component stemming from managerial discretion; and the impact of corporate governance reforms on accrual mispricing.

This study employs the Mishkin (1983) rational expectations test to examine whether the earnings expectations embedded in stock prices accurately reflect the differential persistence of earnings components. It also employs the hedge portfolio trading strategy to examine whether taking a long position in firms with low accruals and a short position in firms with high accruals will yield positive abnormal stock returns.

The results show that investors overestimate the persistence of accruals and underestimate the persistence of cash flows and subsequently, overprice the accruals and underprice the cash flows. The evidence of accrual mispricing is severe for the component of discretionary accruals. Nonetheless, the association between discretionary accruals and abnormal returns are weakened during the corporate governance reforms period.

It should be cautious to attribute the investors' ability to accurately price accruals and cash flows to the passage of corporate governance reform program. Despite there is control for firm size, book-to-market, PE multiple, growth and leverage, other macro-economic factors such as interest rates, inflation and GDP could potentially have an impact on stock returns.

The passage of corporate governance reform program has increased the level of financial reporting disclosure and the monitoring of management, which subsequently improved accruals persistence and earnings quality. A direct practical implication is that investors should better understand the information in accruals for future earnings when the corporate disclosure environment is strengthened.

This study provides useful information to regulators, academics and investors interested in market efficiency and accrual mispricing. The results suggest that the reform of corporate governance is associated with more efficient prices. This may be of interest to the regulators who intend to improve earnings quality and financial reporting environment through the regulatory reform.

To test the accrual anomaly in the period of corporate governance reforms is particularly useful to regulators and policy makers. It allows regulators and policy makers to gain insight as whether the change of regulation has been effective – more transparent and timely reporting of financial information are supposed to help the investors to better understand the accruals and thus mitigate the potential for accrual mispricing.

The purpose of this paper is to examine whether the stock market in India is efficient in the semi-strong form.

The study uses financial and stock market data of 1,135 listed Indian companies (non-financial) during 2003–2011 collected from Capital IQ to estimate discretionary accruals (DA) using modified Jones model (1995). The study also examines using the widely used Mishkin (1983) test to whether equity market prices accruals in India. The study is conducted for profit/loss-making firms separately as well as for a hedge portfolio of firms based on the lowest to highest accruals.

The empirical study of DA of 1,135 listed Indian companies (non-financial) during 2003–2011 shows that the estimated average DA of the corporate sector in India comes to 1 percent of the total assets of these firms. An empirical analysis whether equity market prices DA in India finds no evidence of investors/market pricing DA. Empirical evidence also finds that the results are invariant for profit/loss-making firms as well as portfolio of firms based on the lowest to highest accruals in the Indian context. The empirical evidence shows that the Indian equity market is inefficient with regard to the incorporation of accruals in expected returns of stocks.

This study builds on the previous literature on accrual pricing in the context of the USA and developed markets. The study extends the empirics to the one of the largest emerging market economy – India. This issue is important not only to investors, but also to policy makers and researchers because the mispricing of accruals could potentially lead to misallocation of capital. The study has implications for stock/firm valuations and cost of equity/capital.

This is the first study for the pricing of accruals and test of semi-strong efficiency of the Indian stock market.

The current study aims at examining the impact of upward and downward earnings management on the cross-sections of stock return. The study also examines the moderating role of cross-sectional effects on the association between earnings management and stock returns.

The study employed univariate and bivariate-sorted portfolio-level analysis to investigate the issue. Fama–Macbeth cross-sectional regression is used to analyze the moderating role of different cross-sectional effects. The study used a sample of 3085 Bombay Stock Exchange (BSE) listed stocks spanning over 20 years from January 2000 to December 2019.

The findings suggest that investors have different perceptions toward different forms of earnings management. In other words, results exhibit that investors perceive downward earnings management as an element of risk; hence, they discount the returns at a higher rate. On the contrary, results show that upward earnings management is positively perceived by the investors; hence, they hold the stocks even at a lower rate of return. This relation is found to be consistent even after controlling the impact of marker effect, size effect, value effect and momentum effect.

This study is among pioneering studies that consider the direction of earnings management while examining its impact on the stock return. This study is also among the earlier attempts to examine the moderating role of four different cross-sectional effects by taking a uniform sample of stocks over the same period.

The purpose of this paper is to investigate whether the special items (SI) mispricing reported in Burgstahler et al. is distinct from the accruals (ACC) mispricing documented in Sloan.

This paper employs the control hedge‐portfolio test, non‐overlap hedge‐portfolio test, and regression analysis to determine whether the SI anomaly is distinct from the ACC anomaly. In addition, the Mishkin test is used to examine the impact of SI on the ACC anomaly.

This paper has four main findings. First, one‐year‐ahead abnormal returns to the special‐items‐based hedge portfolio are much diminished when holding ACC constant, whereas those to the ACC‐based hedge portfolio remain significantly positive when holding SI constant. Second, the special‐items‐based hedge portfolio loses much of its ability to earn future abnormal returns without the help of extreme ACC, whereas the ACC‐based hedge portfolio remains profitable without the help of extreme SI. Third, SI are no longer negatively associated with future abnormal returns after controlling for ACC, whereas ACC remain negatively associated with future abnormal returns after controlling for SI. Finally, SI affect the extent to which the market overprices ACC, with negative (positive) SI aggravating (alleviating) ACC overpricing.

This is the first paper to show that the SI anomaly is dependent on the ACC anomaly.

This paper aims to replicate 148 anomalies and to examine whether the performance of the Korean market anomalies is statistically and economically significant. First, the authors observe that only 37.8% anomalies in the universe of the KOSPI and the KOSDAQ and value-weighted portfolios have t-statistics that exceed 1.96. When the authors impose a higher threshold (an absolute value of t-statistics of 2.78), only 27.7% of the 148 anomalies survive. Second, microcaps have large impacts. The results vary significantly depending on whether the sample included stocks in the KOSDAQ and whether value-weighted or equal-weighted portfolios are used. The results suggest that data mining explains large portion of abnormal returns. Any tactical asset allocation strategies based on market anomalies should be applied very cautiously.

Motivated by recent studies that demonstrate the superiority of the Global Industry Classification System (GICS) relative to the Standard Industry Classification (SIC) system in capital market research, the authors revisit the stock market anomaly documented by Thomas and Zhang (TZ) (“Overreaction to intra-industry information transfers?” Journal of Accounting Research, Vol. 46, pp. 909-940) and analyze whether the anomaly based on SIC remains evident when intra-industry information transfers are based on the GICS. The paper aims to discuss these issues.

The authors first replicate TZ and test whether stock prices of late announcers in response to earnings reported by early announcers in the same SIC industry are significantly related to subsequent price responses of late announcers to their own earnings reports. In the multivariate setting, the authors then evaluate whether the magnitude and significance of the overreaction anomaly changes under the more comprehensive GICS and across different time periods.

The authors first confirm the over-reaction anomaly based on SIC as documented by TZ. Utilizing a larger sample of firms based on the GICS and extending TZ for a new time period, the authors then demonstrate that the overreaction anomaly disappears during recent years, a period that is characterized by markedly higher trading activity.

The findings provide new insights and contributions to the debate on whether or not market significantly misprices information transfers.

The authors are first to utilize the GICS in evaluating intra-industry information transfers.