Value-Glamour and Accruals Mispricing: One Anomaly or Two?

Posted: 20 Oct 2003

See all articles by Hemang Desai

Hemang Desai

Southern Methodist University (SMU) - Accounting Department

Shivaram Rajgopal

Columbia Business School

Mohan Venkatachalam

Duke University - Fuqua School of Business

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Abstract

We investigate Beaver's (2002) conjecture that the accruals anomaly is a manifestation of the glamour stock phenomenon documented in the finance literature. Value (glamour) stocks, characterized by low (high) past sales growth, high (low) B/M, high (low) E/P and high (low) C/P, are known to earn positive (negative) future abnormal returns. Note that "C" or cash flow is operationalized in the finance literature as earnings adjusted for depreciation. Sloan (1996) shows that firms with low (high) total accruals earn positive (negative) future abnormal returns. We find that a new variable, operating cash flows measured as earnings adjusted for depreciation and working capital accruals, scaled by price (CFO/P) captures mispricing attributed to the four traditional value-glamour proxies and accruals. Interpretation of this finding with respect to Beaver's conjecture depends on the reader's priors. If the reader believes that value-glamour can be operationalized only as C/P, and not CFO/P, then one would conclude that (i) Beaver's conjecture is invalid; and (ii) CFO/P is a parsimonious variable that captures the mispricing attributes of two distinct anomalies, value-glamour and accruals. However, if a reader views the value-glamour anomaly broadly as a fundamentals-to-price anomaly, then (i) CFO/P variable can be considered an expanded value-glamour proxy and; (ii) our results are consistent with Beaver's conjecture that the accruals anomaly is the glamour stock phenomenon in disguise.

JEL Classification: G14, M41

Suggested Citation

Desai, Hemang and Rajgopal, Shivaram and Venkatachalam, Mohan, Value-Glamour and Accruals Mispricing: One Anomaly or Two?. Accounting Review, April 2004. Available at SSRN: https://ssrn.com/abstract=455600

Hemang Desai

Southern Methodist University (SMU) - Accounting Department ( email )

United States
214-768-3185 (Phone)
214-768-4099 (Fax)

Shivaram Rajgopal (Contact Author)

Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

Mohan Venkatachalam

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-7859 (Phone)
919-660-7971 (Fax)

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