Investors’ Expectation of Loss Reversal and Test of Accruals Mispricing
47 Pages Posted: 21 Feb 2013 Last revised: 4 Jul 2013
Date Written: February 22, 2013
This study reconciles the findings in recent studies regarding the disappearing accruals anomaly and the sustained cash flows anomaly. We attribute the contrasting results to the firms having both highly negative accruals and cash flows. They exhibit highly negative future stock returns although their accruals level is low. For these firms, aside from the previously documented performance-related delisting effects, it appears that investors expect large losses to reverse but are, in fact, negatively surprised by the persistence of negative cash flows. Our results indicate that investors’ different priors of the future earnings behavior of loss versus profit firms partially explain the contrasting results in prior studies. To conclude, we reconcile the findings of this study to those of prior studies (Desai et al. 2004; Dopuch et al. 2010; Hafzalla et al. 2011).
Keywords: Accruals Anomaly, Cash Flows Anomaly, Loss Reversal
JEL Classification: M41
Suggested Citation: Suggested Citation