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Is There an Accruals or a Cash Flow Anomaly in UK Stock Returns?

38 Pages Posted: 4 Jan 2011  

Nuno Soares

Universidade do Porto

Andrew W. Stark

University of Manchester - Manchester Business School

Date Written: January 3, 2011

Abstract

In this paper, we apply a modified one-stage version of the Mishkin (1983) test to companies in the UK stock market in order to investigate the presence or otherwise of the accruals anomaly in UK firms’ annual returns. For the period of 1990-2007, we report that there is little evidence of a general accruals anomaly in the UK, in which accruals have a negative relationship with future returns, once risk and other potential forecasting variables have been accounted for. We also provide evidence that, after winsorising extreme observations, there is a cash flow anomaly in the UK stock market. We also find evidence in favour of an anomaly with respect to capital expenditure growth. Another interpretation is that the accruals anomaly is not distinct from other anomalies in the UK market, whereas the cash flow (and the capital expenditure growth) anomaly is.

Keywords: Accruals anomaly, accrual based accounting, cash flows, financial statement analysis

JEL Classification: M41, G11, G14

Suggested Citation

Soares, Nuno and Stark, Andrew W., Is There an Accruals or a Cash Flow Anomaly in UK Stock Returns? (January 3, 2011). Available at SSRN: https://ssrn.com/abstract=1734507 or http://dx.doi.org/10.2139/ssrn.1734507

Nuno Soares (Contact Author)

Universidade do Porto ( email )

Faculdade de Engenharia
Rua Dr. Roberto Frias
Porto, 4200-465
Portugal

Andrew W. Stark

University of Manchester - Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

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