Asymmetric Persistence and the Market Pricing of Accruals and Cash Flows

Abacus, Forthcoming

32 Pages Posted: 12 Oct 2015

See all articles by Theodosia Konstantinidi

Theodosia Konstantinidi

City University London - The Business School

Arthur G. Kraft

City University London - Cass Business School

Peter F. Pope

Bocconi University; London School of Economics and Political Science

Date Written: August 2015

Abstract

We investigate whether stock prices reflect the asymmetric persistence of accruals and cash flows resulting from conditional conservatism. Using the Mishkin (1983) test (MT), we provide further evidence on the earnings fixation explanation for the accrual anomaly. We also apply panel estimation techniques that significantly affect market efficiency inferences. Our results suggest that over our sample period (1) investors seem to partially anticipate asymmetric persistence in accruals and cash flows; (2) the accrual anomaly originates in the mispricing of accruals in years of economic gains, even though the differential persistence between accruals and cash flows is greatest in years of economic losses; (3) investors respond differently to accrual and cash flow surprises and therefore they do not naively fixate on earnings surprises; and (4) after clustering standard errors in the MT by firm and year dimensions, there is no longer evidence of cash flow mispricing, while the statistical significance of accrual mispricing falls. All our findings contradict the earnings fixation explanation for the accrual anomaly. Our study has implications for understanding the accrual anomaly in relation to accrual dynamics, as well as for researchers interested in using the MT framework to test the rationality of investor expectations more generally.

Keywords: accrual mispricing, conditional conservatism, custered standard errors

JEL Classification: C33, G14, M41

Suggested Citation

Konstantinidi, Theodosia and Kraft, Arthur Gerald and Pope, Peter F., Asymmetric Persistence and the Market Pricing of Accruals and Cash Flows (August 2015). Abacus, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2672675

Theodosia Konstantinidi (Contact Author)

City University London - The Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

Arthur Gerald Kraft

City University London - Cass Business School ( email )

London, EC2Y 8HB
Great Britain

Peter F. Pope

Bocconi University ( email )

Dept of Accounting
Milan, 20136
Italy

London School of Economics and Political Science ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
184
Abstract Views
951
Rank
296,078
PlumX Metrics