Limited Attention, Statement of Cash Flow Disclosure, and the Valuation of Accruals

62 Pages Posted: 2 Nov 2013 Last revised: 1 Dec 2015

See all articles by Bin Miao

Bin Miao

National University of Singapore

Siew Hong Teoh

University of California, Irvine - Accounting Area

Zinan Zhu

National University of Singapore

Date Written: November 24, 2015

Abstract

We test for the effect of limited attention on the valuation of accruals by comparing the immediate and long-term market reactions to earnings announcements between a subsample of firms that disclose only the balance sheet with a subsample of firms that disclose both the balance sheet and the statement of cash flows (SCF) in the earnings press release. Information about accruals generally can be inferred from comparative balance sheets, but the availability of the SCF makes accruals more salient and easier to process for investors with limited attention. Controlling for potential additional information and endogeneity of SCF disclosure, we find strong evidence that SCF disclosure enables more efficient pricing of accruals. Further analyses using a proxy for investor sophistication suggest that when SCF is absent from the earnings press release, less sophisticated investors fail to discount accruals but sophisticated investors do.

Keywords: Limited attention, Cash flow disclosure, Voluntary disclosure, Accrual valuation, Salience, Information processing cost

JEL Classification: G14, M40

Suggested Citation

Miao, Bin and Teoh, Siew Hong and Zhu, Zinan, Limited Attention, Statement of Cash Flow Disclosure, and the Valuation of Accruals (November 24, 2015). Available at SSRN: https://ssrn.com/abstract=2348541 or http://dx.doi.org/10.2139/ssrn.2348541

Bin Miao

National University of Singapore ( email )

15 Kent Ridge Drive
Singapore, 119245
Singapore

Siew Hong Teoh

University of California, Irvine - Accounting Area ( email )

Irvine, CA 92697-3125
United States

Zinan Zhu (Contact Author)

National University of Singapore ( email )

15 Kent Ridge Drive
Singapore, 119245
Singapore

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