Evidence of the Abnormal Accrual Anomaly Incremental to Operating Cash Flows

Posted: 25 Apr 2006

See all articles by C.S. Agnes Cheng

C.S. Agnes Cheng

Hong Kong Polytechnic University - School of Accounting and Finance

Wayne B. Thomas

University of Oklahoma

Abstract

Recent research provides evidence that the operating cash flows-to-price ratio subsumes accruals in explaining future annual returns. This suggests that the accrual anomaly is part of the overall value-glamour anomaly and does not represent the mispricing of earnings. We extend the literature by using multiple measures of abnormal accruals and separate analyses of future annual returns and future earnings announcement returns. The results reveal that the operating cash flows-to-price ratio does not subsume abnormal accruals in explaining future annual returns or future announcement returns. We also find that the operating cash flows-to-price ratio does not subsume total accruals in explaining future announcement returns. These results are not consistent with accruals being a manifestation of the value-glamour anomaly. Our study contributes to the current debate on the existence and the extent of the (abnormal) accrual anomaly. Moreover, the methodology employed can help researchers in exploring mispricing phenomena.

Keywords: Abnormal Accruals, Market Mispricing, Operating Cash Flows-to-Price Ratio, Value-Glamour Anomaly

JEL Classification: M41, M43, G14

Suggested Citation

Cheng, C.S. Agnes and Thomas, Wayne B., Evidence of the Abnormal Accrual Anomaly Incremental to Operating Cash Flows. Accounting Review, Vol. 81, October 2006. Available at SSRN: https://ssrn.com/abstract=898160

C.S. Agnes Cheng

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

M715, Li Ka Shing Tower
Hung Hom, Kowloon, Kowloon
Hong Kong

Wayne B. Thomas (Contact Author)

University of Oklahoma ( email )

Michael F. Price College of Business,
307 W Brooks, Rm 212B
Norman, OK 73019
United States
405-325-5789 (Phone)
405-325-7348 (Fax)

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