On the persistence and pricing of industry-wide and firm-specific earnings, cash flows, and accruals

Kai Wai Hui, Karen K. Nelson and P. Eric Yeung

Journal of Accounting and Economics, 2016, vol. 61, issue 1, 185-202

Abstract: Economic theory suggests that the industry-wide component of firm performance is more persistent than the firm-specific component. This paper provides evidence on this assertion and tests whether investors misprice these components of earnings. Consistent with predictions, we find greater persistence in the industry-wide component of earnings that is not fully recognized in stock prices. We show that these effects are partially driven by the market׳s inability to recognize the differential persistence of industry-wide earnings in homogenous industries or in the presence of a large business shock. Finally, we show that industry-wide cash flows is the most persistent component of earnings while firm-specific accruals is the least persistent, suggesting that economic fundamentals and accounting constructs are jointly informative about firms׳ future earnings. The market predictably misprices these components, however, significantly underweighting the persistence of industry-wide cash flows and overweighting the persistence of firm-specific accruals.

Keywords: Accruals; Cash flows; Earnings; Persistence; Stock returns (search for similar items in EconPapers)
JEL-codes: G14 M41 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jaecon:v:61:y:2016:i:1:p:185-202

DOI: 10.1016/j.jacceco.2015.06.003

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