Investors’ Expectation of Loss Reversal and Test of Accruals Mispricing

47 Pages Posted: 21 Feb 2013 Last revised: 4 Jul 2013

See all articles by Jung Hoon Kim

Jung Hoon Kim

San Francisco State University - College of Business

Young Jun Kim

Hankuk University of Foreign Studies

Date Written: February 22, 2013

Abstract

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

Kim, Jung Hoon and Kim, Young Jun, Investors’ Expectation of Loss Reversal and Test of Accruals Mispricing (February 22, 2013). Available at SSRN: https://ssrn.com/abstract=2221134 or http://dx.doi.org/10.2139/ssrn.2221134

Jung Hoon Kim (Contact Author)

San Francisco State University - College of Business ( email )

San Francisco, CA
United States

Young Jun Kim

Hankuk University of Foreign Studies ( email )

270 Imun-dong Dongdaemun-gu
Seoul, 130-791
Korea, Republic of (South Korea)

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