The Implications of Retained and Distributed Earnings for Future Profitability and Stock Returns

Review of Accounting and Finance, Vol. 9, pp. 395-423, 2010

Posted: 16 Feb 2006 Last revised: 16 Nov 2010

See all articles by George A. Papanastasopoulos

George A. Papanastasopoulos

University of Piraeus - Department of Business Administration

Dimitrios D. Thomakos

University of Peloponnese - School of Management, Economics and Informatics; University of Bologna - Rimini Center for Economic Analysis (RCEA)

Tao Wang

City University of New York (CUNY) - Department of Economics

Date Written: November 14, 2010

Abstract

We examine the informational content of retained and distributed earnings for future profitability and stock returns. We find that investors act as if the components of retained earnings (current operating accruals, non current operating accruals and retained cash flows) have similar implications for future profitability, leading to an overvaluation of their differential persistence. It also appears that while they cannot distinguish between the distinct properties of distributed earnings, they correctly anticipate the persistence of net cash distributions to debt holders (net debt repayment) but underestimate the persistence of net cash distributions to equity holders (dividends minus net stock issues). Overall, our evidence suggests that the accrual anomaly documented in the accounting literature and the anomaly on net stock issues documented in the finance literature could be a subset of a larger anomaly on retained earnings.

Keywords: retained earnings, distributed earnings, accruals, cash flows, profitability, stock returns

JEL Classification: M4

Suggested Citation

Papanastasopoulos, George A. and Thomakos, Dimitrios D. and Wang, Tao, The Implications of Retained and Distributed Earnings for Future Profitability and Stock Returns (November 14, 2010). Review of Accounting and Finance, Vol. 9, pp. 395-423, 2010 . Available at SSRN: https://ssrn.com/abstract=882108

George A. Papanastasopoulos (Contact Author)

University of Piraeus - Department of Business Administration ( email )

80, KARAOLI & DIMITRIOU,PIRAEUS
Piraeus, 18534
Greece

Dimitrios D. Thomakos

University of Peloponnese - School of Management, Economics and Informatics ( email )

Department of Economics
22100 Tripolis
Greece
+30 2710 230139 (Fax)

HOME PAGE: http://es.uop.gr/

University of Bologna - Rimini Center for Economic Analysis (RCEA)

Via Patara, 3
Rimini (RN), RN 47900
Italy

Tao Wang

City University of New York (CUNY) - Department of Economics ( email )

65-30 Kissena Blvd
Flushing, NY 11367-1597
United States

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