Asymmetric persistence and the market pricing of accruals and cash flows

Theodosia Konstantinidi, Arthur Kraft and Peter F. Pope

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: We investigate whether stock prices reflect the asymmetric persistence of accruals and cash flows resulting from conditional conservatism. Using the Mishkin (1983) test (MT), we provide further evidence on the earnings fixation explanation for the accrual anomaly. We also apply panel estimation techniques that significantly affect market efficiency inferences. Our results suggest that over our sample period (1) investors seem to partially anticipate asymmetric persistence in accruals and cash flows; (2) the accrual anomaly originates in the mispricing of accruals in years of economic gains, even though the differential persistence between accruals and cash flows is greatest in years of economic losses; (3) investors respond differently to accrual and cash flow surprises and therefore they do not naively fixate on earnings surprises; and (4) after clustering standard errors in the MT by firm and year dimensions, there is no longer evidence of cash flow mispricing, while the statistical significance of accrual mispricing falls. All our findings contradict the earnings fixation explanation for the accrual anomaly. Our study has implications for understanding the accrual anomaly in relation to accrual dynamics, as well as for researchers interested in using the MT framework to test the rationality of investor expectations more generally.

Keywords: accrual mispricing; cash flow mispricing; asymmetric persistence; conditional conservatism; Mishkin test; clustered standard errors (search for similar items in EconPapers)
JEL-codes: C33 G14 M41 (search for similar items in EconPapers)
Date: 2016-04-19
References: Add references at CitEc
Citations: View citations in EconPapers (7)

Published in Abacus, 19, April, 2016, 52(1), pp. 140-165. ISSN: 0001-3072

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