Accruals, Cash Flows and the Post-Earnings-Announcement Drift

41 Pages Posted: 2 Feb 2005

Multiple version iconThere are 2 versions of this paper

Date Written: January 4, 2005

Abstract

Several prior studies have shown that cash flows have significantly greater impact on stock prices than accruals. We examine the implications of these findings for the post-earnings-announcement-drift anomaly. We argue that, if investors under-react to earnings news, then the larger price impact of cash flows causes the cash flow component of earnings news to predict future returns better than the accruals component. Consistent with this argument, we show that unexpected cash flows are more positively related to future returns, than are unexpected accruals. Also, unexpected cash flows are found to predict future returns above and beyond that predicted by earnings surprises. Finally, we show that a strategy that decomposes earnings news into its components significantly outperforms strategies based on earnings news alone. The results support under-reaction explanations for the drift.

Keywords: accruals, cash flows, post-earnings-announcement drift, earnings momentum

JEL Classification: G14, M41, M43

Suggested Citation

Shivakumar, Lakshmanan, Accruals, Cash Flows and the Post-Earnings-Announcement Drift (January 4, 2005). Available at SSRN: https://ssrn.com/abstract=644202 or http://dx.doi.org/10.2139/ssrn.644202

Lakshmanan Shivakumar (Contact Author)

London Business School ( email )

Regent's Park
London, NW1 4SA
United Kingdom
+44 20 7000 8115 (Phone)
+44 20 7000 8101 (Fax)

HOME PAGE: http://faculty.london.edu/lshivakumar/

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