Disclosure Quality and the Mispricing of Accruals and Cash Flow

43 Pages Posted: 13 May 2007 Last revised: 21 Mar 2010

See all articles by Michael S. Drake

Michael S. Drake

Brigham Young University - Marriott School

James N. Myers

University of Tennessee, Knoxville - College of Business Administration

Linda A. Myers

University of Tennessee, Haslam College of Business, Accounting and Information Management

Date Written: August 1, 2008

Abstract

In this paper, we investigate the role that disclosure quality plays in the accurate valuation of accruals and cash flow. We predict that stock prices of firms with higher-quality disclosures more accurately reflect the persistence of accruals and cash flow. We test our predictions using analyst ratings of disclosure published in the annual Association for Investment Management and Research (AIMR) Corporate Information Committee Reports for the years 1982 through 1996. The results provide strong evidence of mispricing for the subset of firms with lower-quality disclosures and of a significant reduction in mispricing for the subset of firms with higher-quality disclosures. We confirm the results of our Mishkin tests using returns regressions that also control for investor sophistication, analyst following, and firm life cycle stage. Overall, our results demonstrate the mitigating effect that higher-quality disclosure has on mispricing.

Keywords: Disclosure quality, mispricing, accrual anomaly, cash flow mispricing

JEL Classification: M40

Suggested Citation

Drake, Michael S. and Myers, James N. and Myers, Linda A., Disclosure Quality and the Mispricing of Accruals and Cash Flow (August 1, 2008). Journal of Accounting, Auditing and Finance, 2009. Available at SSRN: https://ssrn.com/abstract=985949 or http://dx.doi.org/10.2139/ssrn.985949

Michael S. Drake

Brigham Young University - Marriott School ( email )

United States

James N. Myers (Contact Author)

University of Tennessee, Knoxville - College of Business Administration ( email )

Haslam Business Building
Knoxville, TN
United States

Linda A. Myers

University of Tennessee, Haslam College of Business, Accounting and Information Management ( email )

Knoxville, TN
United States

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