Is there an accruals or a cash flow anomaly in UK stock returns?

Nuno Soares (ndsoares@fe.up.pt.) and Andrew W. Stark (andrew.stark@mbs.ac.uk)
Additional contact information
Nuno Soares: Faculdade de Engenharia, Universidade do Porto, Portugal and CEF.UP, Faculdade de Economia, Universidade do Porto, Portugal
Andrew W. Stark: Manchester Business School, UK

CEF.UP Working Papers from Universidade do Porto, Faculdade de Economia do Porto

Abstract: In this paper, we apply a modified version of the Mishkin (1983) test to companies in the UK stock market in order to investigate the presence of accruals and cash flow effects on UK firms’ annual returns. First, we find that accruals decile rankings have U-shaped, or inverted U-shaped, or no relationships with most of the risk variables. Accruals decile rankings have, however, a negative relationship with the ratio of research and development to market value which is known to have a positive relationship with returns. Second, regarding the relationship between risk controls and returns, we find evidence associated with an RD effect and some evidence in favour of earnings-price and past return effects. We find little evidence of firm size, book to-market, and firm leverage effects, once the other variables are controlled for. Third, for the period 1990-2007, we report little evidence of general accruals mispricing in the UK in which accruals have a negative relationship with future returns, once risk has been accounted for. Additionally, after treatment of extreme observations, evidence of cash flow mispricing is found for the UK stock market. An alternative interpretation of our results is that there is no separate accruals effect, at least in the way predicted by the conventional mispricing stories, once other effects are taken into account, but there is a separate cash flow effect.

Keywords: Accruals anomaly; accrual based accounting; cash flows; financial statement analysis (search for similar items in EconPapers)
JEL-codes: G11 G14 M41 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2011-12
New Economics Papers: this item is included in nep-bec and nep-fmk
References: Add references at CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://www.fep.up.pt/investigacao/cef.up/WP/2011/2011_07_wp.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found (http://www.fep.up.pt/investigacao/cef.up/WP/2011/2011_07_wp.pdf [302 Found]--> https://fep.up.pt/investigacao/cef.up/WP/2011/2011_07_wp.pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:por:cetedp:1107

Access Statistics for this paper

More papers in CEF.UP Working Papers from Universidade do Porto, Faculdade de Economia do Porto Contact information at EDIRC.
Bibliographic data for series maintained by Ana Bonanca (abonanca@fep.up.pt).