Two Essays in the Accrual Anomaly: Further Examining its Causes and Association with Management Earnings Forecasts.
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Essay I: Growth Opportunities and the Accrual Anomaly. This study adopts an equity valuation framework to reexamine the accrual anomaly. Firms at different growth stages have different valuation focuses,and display distinct economic and accounting characteristics. We posit that the information conveyed in accruals about future growth and profitability varies with a firms growth opportunities,thus giving rise to dissimilar investor behavior in mis)pricing accruals and cash flows for firms in different growth phases. Our evidence is consistent. We find that the accrual anomaly is more pronounced for firms at the high growth stage,it weakens at the low growth stage and diminishes further at the decline stage. At the high growth and low growth stages,the anomaly is attributed to both overpricing of high accruals and underpricing of cash flows,whereas at the decline stage it is due to the underpricing of cash flows only,with accruals correctly priced. We further find that the mispricing of accruals occurs mainly for high accrual firms whereas mispricing of cash flows occurs mainly for low accrual firms,indicating that they are two distinct phenomena and one does not subsume the other. Our results suggest that a simple explanation that is fixated on a single accounting or economic attribute such as accrual persistence or growth) is not adequate to account for changing pricing behavior across firms operating under heterogeneous conditions. Essay II: Management Earnings Forecasts and the Accrual Mispricing. This study investigates the association between management earnings forecasts and the mispricing of accruals,and whether this association is due to earnings management-caused discretionary accruals. Consistent with Xu 2010) that management earnings forecasts reflect information on accruals and affect investors assessment of the valuation implications of accruals,and Xie 2001) that the market misprices discretionary accruals,using discretionary accruals as our measure of earnings management,we find that firms with management earnings forecasts are associated with less mispricing of total accruals,and this association is mainly due to discretionary accruals. The results exist only for short-horizon management forecasts,and are stronger for firms that just meet or beat earnings expectation,where firms are suspected to have stronger tendencies to manage earnings,suggesting that this association may potentially results from managers superiority in understanding the nature of managerial opportunism-induced accruals. Finally,the results are also stronger for firms with higher litigation risk and those with stronger corporate governance proxied by institutional shareholdings).