Pricing of Accounting Accruals Information and Revisions of Analyst Earnings Forecasts: Evidence from Tokyo Stock Exchange Firms

Abstract:     
This paper investigates how accurately the information contained in accounting accruals and their components are impounded into stock prices and provide evidence on the accounting accruals and the revisions of analyst earnings forecasts in terms of pricing or mispricing the stock. The results from the regression analyses with pooled data and the ones from the cross-sectional Fama and MacBeth tests unanimously suggest that the accounting accruals and their components, in particular, the abnormal accruals, have significant explanatory power in explaining the future stock returns, even after adjusting for the systematic risk of the stocks. Second, we conduct hedging portfolio tests and find that the accruals information helps investors earn abnormal returns. Finally, we investigate the relationship between the abnormal accruals and the revisions of analyst earnings forecasts. We find that the larger the abnormal accruals of the firms, the higher the subsequent downward revisions of analyst forecasts. The evidence indicates that the analysts fail to incorporate the full implications of accruals information in forming their forecasts, even though such an overestimation or underestimation eventually is corrected as the next year's earnings related information becomes publicly available.

Number of Pages in PDF File: 40

Keywords: accounting accruals, mispricing, analyst earnings forecasts

JEL Classification: M41, G14, G15

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