Author: Ala Ahmad Publisher: ISBN: Category : Languages : en Pages :
Book Description
This research explores new evidence on the profitability, consistency and potential explanations of the accruals anomaly. We extend prior research into the association between earnings and share price by discrirninating between firms on the basis of the abnormal accruals contained in the reported operating profits. We investigate the accounting abnormal accruals enigma using U.K company data for the period 1968- 2005 to see whether companies reporting incomes consisting of the highest [lowest] operating abnormal accruals as a proportion of total assets significantly earn lower [higher] returns than the generality of the companies. We define a firm's abnormal accrual as the difference between its actual and normal total accruals. Total accruals are calculated as the change in non-cash working capital before income taxes payable less total depreciation expense. The themes of this thesis are two-fold. First, the time-series version of the Modified Jones Model is employed to decompose total operating accruals as they appear on the sample companies' financial statements into normal and abnormal accruals. Second, an empirical examination of the profitability and consistency of the abnormal accruals anomaly is undertaken. Abnormal returns for abnormal accruals deciles are estimated using a range of tests: the market-, the size-, the book-to-market- and the size-and-book-to-market-adjusting tests. Our abnormal returns estimates for the abnormal accruals deciles show evidence that the abnormal accruals anomaly in the UK is driven particularly by the highest abnormal accruals firms with significant negative abnormal returns over three years of about 4-5% per annum. Potential risk explanations for the observed accruals anomaly based on variety of tests including the use of the Fama and French three factor model are provided. The findings indicate that the abnormal accruals anomaly is robust after controlling for the risk factors. Therefore, the implication of this study is to short sell those shares in the highest abnormal accruals decile or, alternatively, to avoid buying them.
Author: Gulraze Wakil Publisher: ISBN: Category : Accounting Languages : en Pages : 227
Book Description
A consequence of accruals anomaly is the ability to make significant abnormal returns by using information about the components of accounting earnings - accruals and cash flows. Surprisingly, these abnormal returns from the mispricing of stocks due to accruals are still found by accounting and finance researchers even though the accruals anomaly was initially identified in 1996. The prominent reason for the accruals anomaly is that the persistence of accruals in predicting future earnings is misinterpreted by investors. Sloan (1996) found that stock prices do not instantaneously capture the differential persistence of accruals and cash flows. In other words, investors tend to overprice accruals and under price cash flows when developing earnings expectations. As a result, high accrual firms earn negative abnormal returns and low accrual firms earn positive abnormal returns in the future when accruals turn out to be less persistent than cash flows. This study examines how accounting conservatism affects accrual persistence and, in turn, the ability to earn abnormal returns. Conservative accounting practice results from recognizing losses in a timely manner and reporting lower book values. Relying on contracting theory, I split conservatism into contracting, litigation, regulation, and taxation explanations (Watts, 2003). Specifically, I investigate: (1) How is the persistence of different magnitudes of accruals affected by overall degree of conservatism and each of the conservatism explanations? (2) What effect does the overall degree of conservatism and each of the conservatism explanations have on the accruals anomaly? Consistent with expectations, the findings show that accounting conservatism increases the persistence of accruals in high accrual firms. This increase in persistence is also supported by conservatism explained by contracting and litigation. Additionally, the increased persistence from overall degree of conservatism is shown to lower accrual anomaly of high conservatism and high accrual firms. These results are further supported by the market efficiency tests using the Mishkin (1983) model. The dissertation contributes to the literature by revealing the relationship between conservatism, accruals anomaly, and security returns, which has not been documented before at the firm-level. These findings should have broad implications for accounting standards setters and investors. The FASB has recently expressed concerns about conservatism's lack of neutrality. This study lends support for retaining accounting conservatism in financial reporting by demonstrating that conservatism increases the persistence of accruals and reduces future negative abnormal returns of high accrual firms. The latter result indicates that greater conservatism could potentially reduce the accruals anomaly from high accrual firms.
Author: Nuno Soares Publisher: ISBN: Category : Languages : en Pages : 56
Book Description
In this paper, we provide evidence related to the existence, or otherwise, of the accruals anomaly in the UK stock market. Specifically, we find that average annual abnormal returns generally decline as prior period accruals move from low to high. This outcome can be interpreted as broadly consistent with the accruals anomaly via which investors overweight the persistence of accruals and underweight the persistence of cash flows in predicting next period's earnings. Our results suggest that to make money out of any mispricing based upon ranking firms by accruals generally requires a portfolio strategy with long and, in particular, short positions in portfolios featuring relatively small capitalisation firms. When taking into account conservative estimates of trading costs, the investment strategy is seen to generate losses if an initially equally-weighted investment approach is used or positive, but not statistically significant, abnormal returns if a value-weighted approach is followed.Overall, we conclude that, whilst there is evidence of mispricing consistent with the accruals anomaly, the profitable exploitation of the anomaly is not necessarily possible when transactions costs are taken into account. Thus, the accruals anomaly is not so egregious in the UK as to challenge the semi-strong version efficient markets hypothesis.
Author: Leonidas C. Doukakis Publisher: ISBN: Category : Languages : en Pages :
Book Description
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: Leonard Zacks Publisher: John Wiley & Sons ISBN: 1118127765 Category : Business & Economics Languages : en Pages : 352
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: Messod D. Beneish Publisher: ISBN: Category : Languages : en Pages : 52
Book Description
The paper provides evidence that the relation between accruals and future returns is not symmetric. We find that firms with low accruals generate insignificant abnormal returns in asset pricing regressions that control for either earnings quality or operating volatility. In contrast, we find that accrual hedge returns are driven by firms with large positive accruals and firms with high probabilities of earnings overstatement. This asymmetry is consistent with our view that upwards rather than downwards earnings management is an important contributor to accrual mispricing. We also find that firms with high accruals are smaller and have higher arbitrage risk (residual return volatility), suggesting that short sellers are unlikely to arbitrage away these negative abnormal returns. We conclude that an omitted risk factor explains results for low accruals and that transaction costs/limits to arbitrage explain the persistence of mispricing for high accruals.
Author: Henock Louis Publisher: ISBN: Category : Languages : en Pages : 51
Book Description
We analyze whether the nondisclosure of accrual information at earnings announcements might contribute to the abnormal accrual anomaly. Prior studies draw inferences about the pricing of (abnormal) accruals at earnings announcements and around the filing dates through analyses of the long-term stock performance of high and low (abnormal) accrual firms. In this study, we take a more integrated approach by directly analyzing the pricing of abnormal accruals around the earnings announcement, around the SEC filing, and over the year subsequent to the SEC filing, conditional on whether a firm discloses accrual information at the earnings announcement. We find no evidence of accrual mispricing for firms that disclose accrual information at the earnings announcement. For these firms, the market is able to differentiate the discretionary from the nondiscretionary components of the earnings surprise. In contrast, as expected, the market fails to distinguish between the discretionary and the nondiscretionary components of the earnings surprise for firms that do not disclose accrual information at the earnings announcement. These firms experience a stock price correction around the filing date. However, the correction is only partial, resulting in a post-filing drift.
Author: Amna Asim Publisher: ISBN: Category : Languages : en Pages : 71
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: Guohua Jiang Publisher: ISBN: Category : Languages : en Pages : 35
Book Description
I investigate the relationship between contemporaneous stock price performance and the persistence of accrued earnings, and its impact on the accrual anomaly. I find that in a fiscal year, accrued earnings for stocks that have performed poorly are less persistent in predicting future earnings than accrued earnings for stocks that have performed moderately. I further find that a hedge-strategy based on accruals earns greater abnormal returns following bad-news years. The results are consistent with conservative accounting causing accrued earnings to be even less persistent in bad-news year and investors failing to efficiently price this differential in persistence.
Author: Greg N. Gregoriou Publisher: Elsevier ISBN: 0080461670 Category : Business & Economics Languages : en Pages : 463
Book Description
After the cooling off of IPOs since the dot com bubble, Google has rekindled the fire for IPOs. This IPO reader contains new articles exclusive to this reader by leading academics from around the world dealing with quantitative and qualitative analyses of this increasingly popular and important area of finance. Articles address new methods of IPO performance, international IPOs, IPO evaluation, IPO underwriting, evaluation and bookbuilding. Although numerous articles are technical in nature, with econometric and statistical models, particular attention has been directed towards the understanding and the applicability of the results as well as theoretical development in this area. This reader will assist researchers, academics, and graduate students to further understand the latest research on IPOs. *Interest in IPOs is increasing again after the Google IPO, and IPOs are up significantly from last year *Chapters by well known academics provide an international perspective, describing research results from IPO data in countries spanning the globe *Research is based on real results from IPO data collected over the past 5-7 years
Author: Ala Ahmad
Author: Gulraze Wakil
Author: Nuno Soares
Author: Leonidas C. Doukakis
Author: Leonard Zacks
Author: Messod D. Beneish
Author: Henock Louis
Author: Amna Asim
Author: Guohua Jiang
Author: Greg N. Gregoriou