Evidence of the abnormal accrual anomaly incremental to operating cash flows

Cheng-shing Cheng, Wayne B. Thomas

Research output: Journal article publicationReview articleAcademic researchpeer-review

30 Citations (Scopus)

Abstract

Recent research provides evidence that the operating cash flows-to-price ratio subsumes accruals in explaining future annual returns. This suggests that the accrual anomaly is part of the overall value-glamour anomaly and does not represent the mispricing of earnings. We extend the literature by using multiple measures of abnormal accruals and separate analyses of future annual returns and future earnings announcement returns. The results reveal that the operating cash flows-to-price ratio does not subsume abnormal accruals in explaining future annual returns or future announcement returns. We also find that the operating cash flows-to-price ratio does not subsume total accruals in explaining future announcement returns. These results are not consistent with accruals being a manifestation of the value-glamour anomaly. Our study contributes to the current debate on the existence and the extent of the (abnormal) accrual anomaly. Moreover, the methodology employed can help researchers in exploring mispricing phenomena.
Original languageEnglish
Pages (from-to)1151-1167
Number of pages17
JournalAccounting Review
Volume81
Issue number5
DOIs
Publication statusPublished - 1 Oct 2006
Externally publishedYes

Keywords

  • Abnormal accruals
  • Market mispricing
  • Operating cash flows-to-price ratio
  • Value-glamour anomaly

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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