The Accrual Anomaly and Operating Cash Flows: Evidence from Accrual Components

47 Pages Posted: 21 Mar 2006 Last revised: 22 Feb 2012

See all articles by Zhaoyang Gu

Zhaoyang Gu

Chinese University of Hong Kong - School of Accountancy

Prem C. Jain

Georgetown University - Department of Accounting and Business Law

Date Written: 2011

Abstract

We argue and show that aggregation of accrual components (changes in inventories, changes in accounts payable, changes in accounts receivable and depreciation expense) into total accruals results in a loss of mispricing-related information in individual accrual components. This motivates us to examine whether the recent evidence that operating cash flows subsume the mispricing effect associated with total accruals holds when accruals are disaggregated into accrual components. We find that accrual components are associated with future abnormal returns even after controlling for operating cash flows and growth. The three-day earnings announcement period abnormal returns also support the finding. The evidence with respect to change in accounts payable is especially noteworthy because its inclusion in total accruals reduces the mispricing effects of other components considerably. Overall, the prior evidence that operating cash flows subsume the mispricing effects associated with total accruals is likely caused by the aggregation of accrual components into total accruals. Future research would benefit from focusing on accrual components rather than total accruals.

Keywords: accrual anomaly, operating cash flows, accrual components

JEL Classification: M41, M43, G14

Suggested Citation

Gu, Zhaoyang and Jain, Prem C., The Accrual Anomaly and Operating Cash Flows: Evidence from Accrual Components (2011). Available at SSRN: https://ssrn.com/abstract=892250 or http://dx.doi.org/10.2139/ssrn.892250

Zhaoyang Gu

Chinese University of Hong Kong - School of Accountancy ( email )

Shatin, N.T.
Hong Kong

Prem C. Jain (Contact Author)

Georgetown University - Department of Accounting and Business Law ( email )

McDonough School of Business
Georgetown Univeristy
Washington, DC 20057
United States
202-697-9455 (Phone)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
819
Abstract Views
3,964
rank
41,207
PlumX Metrics