Implications of Firms Having Both Highly Negative Accruals and Cash Flows for Test of Accruals Anomaly

2017 ◽  
Vol 31 (1) ◽  
pp. 1-22
Author(s):  
Jung Hoon Kim ◽  
Young Jun Kim
Keyword(s):  
Stock Returns ◽  
Cash Flows ◽  
Small Subset ◽  
Economic Fundamentals ◽  
Accounts Payable ◽  
Accruals Anomaly ◽  
Loss Firms

SYNOPSIS This study provides evidence that the weak (asset-deflated) accruals anomaly is attributable to firms having both highly negative accruals and cash flows. These firms yield highly negative future stock returns, which weakens the accruals anomaly by depressing overall future stock returns of the lowest accruals portfolio while reinforcing the cash flows anomaly. Among accruals components, accounts payable, depreciation, and non-current accruals capture their declining economic fundamentals and drive away the accruals anomaly. Additionally, we document that firms having both highly negative accruals and cash flows can account for the nonexistence of the accruals anomaly for loss firms, and reconcile the weak asset-deflated accruals anomaly with the robust earnings-deflated accruals anomaly (i.e., percent accruals). Overall, our findings suggest that implications of negative accruals depend on the level of cash flows, and a small subset of firms having both highly negative accruals and cash flows may distort the results of accruals anomaly tests.

Discretionary Risk Disclosures

2003 ◽  
Vol 78 (2) ◽  
pp. 449-469 ◽  
Author(s):  
Bjorn N. Jorgensen ◽  
Michael T. Kirschenheiter
Keyword(s):  
Stock Returns ◽  
Risk Premium ◽  
Voluntary Disclosure ◽  
Cash Flows ◽  
Share Price ◽  
Risk Disclosure ◽  
Share Prices ◽  
Ex Post ◽  
Partial Disclosure ◽  
Future Cash Flows

We model managers' equilibrium strategies for voluntarily disclosing information about their firm's risk. We consider a multifirm setting in which the variance of each firm's future cash flow is uncertain. A manager can disclose, at a cost, this variance before offering the firm for sale in a competitive stock market with risk-averse investors. In our partial disclosure equilibrium, managers voluntarily disclose if their firm has a low variance of future cash flows, but withhold the information if their firm has highly variable future cash flows. We establish how the manager's discretionary risk disclosure affects the firm's share price, expected stock returns, and beta, within the framework of the Capital Asset Pricing Model. We show that whereas one manager's discretionary disclosure of his firm's risk does not affect other firms' share prices, it does affect the other firms' betas. Also, we demonstrate that a disclosing firm has lower risk premium and beta ex post than a nondisclosing firm. Finally, we show that ex ante, the expected risk premium and expected beta of each firm are higher under a mandatory risk disclosure regime than in the partial disclosure equilibrium that arises under a voluntary disclosure regime.

An Analysis of the Sources of Value Loss Following Financial Restatements

2021 ◽  
pp. 0148558X2198991
Author(s):  
Philip K. Hong ◽  
Jaywon Lee ◽  
Sang-Hyun Park ◽  
Sukesh Patro
Keyword(s):  
Stock Returns ◽  
Cash Flow ◽  
Discount Rate ◽  
Stock Price ◽  
Cash Flows ◽  
Financial Fraud ◽  
Earnings Persistence ◽  
Flow Component ◽  
Financial Restatements ◽  
Value Loss

We decompose the total value loss around firms’ announcements of financial restatements into components arising from investors’ revisions in cash flows and discount rates. First, relative to population benchmarks, restatements represent circumstances in which the cash flow component becomes more important in explaining valuations. While we find significant contributions from both sources, with the cash flow component explaining more than 33% of the variation in stock returns surrounding restatement announcements, this component explains only 13% to 22% in comparable non-restating firms. When restatements are caused by underlying financial fraud, the discount rate impact becomes more important, explaining about 88% of return variation. On the contrary, the cash flow impact is relatively larger for firms with higher earnings persistence or restatements associated with errors. Our decomposition of the value loss helps explain returns in the post-announcement period. Firms with a higher relative discount rate impact experience a significant downward stock price drift after the initial announcement-related price decline. For firms with a higher relative cash flow impact, the evidence suggests the initial impact of the restatement announcement is more complete with no subsequent drift pattern. Our findings close gaps in the evidence on financial restatements and extend the literature on the drivers of stock price movements.

Do Financially Constrained Firms Earn Higher Returns than the Unconstrained Firms? A Comprehensive Evidence from Pakistan Stock Exchange

2020 ◽  
Keyword(s):  
Time Series ◽  
Asset Pricing ◽  
Capital Structure ◽  
Stock Returns ◽  
Financial Constraints ◽  
Stock Exchange ◽  
Cash Flows ◽  
Total Asset ◽  
Cash Holding ◽  
The Relationship

This paper examines the relationship between financial constraints and the stock returns explaining the pricing of stock through financially constrained and unconstrained firms in Pakistan. Three proxies; total assets, tangible to total assets and cash holding to total assets ratios) have been used for financial constraints and the study tried to investigate that either the investors are compensated for taking the extra risk or not in Pakistan Stock Exchange (PSX). We find that the financially constrained firms don’t earn higher returns when their capital structure is heavy with liquid assets and their cash flows are more than the unconstrained firms in PSX. Moreover, the time series results showed that the risk-adjusted returns of the most constrained firms give the mix and somewhat negative and significant and insignificant results for the Pakistani firms listed in PSX sorted based on tangible to total assets and Cash holding to total asset ratios. Keywords: Asset Pricing, Financial constraints, risk-adjusted performance of portfolios

scholarly journals Do corporate bond rating revisions convey information about earnings and dividend changes?

2012 ◽  
Vol 9 (3) ◽  
pp. 373-393 ◽  
Author(s):  
Steven T. Anderson ◽  
Gurmeet Singh Bhabra ◽  
Harjeet S. Bhabra ◽  
Asjeet S. Lamba
Keyword(s):  
Stock Returns ◽  
Cash Flows ◽  
Corporate Bond ◽  
Bond Rating ◽  
Future Earnings ◽  
Rating Agencies ◽  
Abnormal Stock Returns ◽  
Rating Changes ◽  
Future Cash Flows ◽  
Rating Downgrades

We study the information content of corporate bond rating changes regarding future earnings and dividends. Consistent with previous findings, rating downgrades are associated with negative abnormal stock returns, while rating upgrades appear to be nonevents. For downgrades, earnings decline in the two years prior to and the year of the rating change announcement but increase in the year after the rating review. We also find that rating downgrades are followed by a subsequent downward adjustment in dividends. While rating upgrades follow a period of rising earnings, they do not signal any increase in future earnings and no subsequent dividend adjustments are observed. Overall, our results indicate that rating agencies respond more to permanent changes in cash flows and provide little information, if any, about future cash flows.

The relative information content of cash flows and earnings affected by their extremity

2014 ◽  
Vol 40 (7) ◽  
pp. 646-661 ◽  
Author(s):  
Wael Mostafa
Keyword(s):  
Stock Returns ◽  
Information Content ◽  
Statistical Significance ◽  
Explanatory Power ◽  
Cash Flows ◽  
Content Type ◽  
Nested Models ◽  
Relative Information ◽  
Security Returns ◽  
Relative Information Content

Purpose – Many studies examine the relative information content of earnings and cash flows from operations. Most studies find that earnings have higher information content than cash flows. An interesting question that follows is whether these findings hold after controlling the extremity of earnings and cash flows. The purpose of this paper is to examine the relative information content of earnings and cash flows in the following four different cases: first, moderate earnings vs moderate cash flows, second, extreme earnings vs moderate cash flows, third, moderate earnings vs extreme cash flows, and fourth, extreme earnings vs extreme cash flows. Design/methodology/approach – To assess the relative information content of earnings and cash flows for each of the four cases mentioned above, the authors compare the explanatory power for regression of returns on unexpected earnings relative to regression of returns on unexpected cash flows. Therefore, the author compares the adjusted R2 of the model with earnings variables and the model with cash flows variables using Vuong's test, that examines the statistical significance of the difference between adjusted R2s of the rival (non-nested) models, and interpret a statistically higher adjusted R2 as an indicator for higher relative information content. Findings – The results show that: first, when both earnings and cash flows are moderate, earnings are more highly associated with stock market price changes than cash flows, second, when both earnings and cash flows are extreme, earnings also have greater relative information content than cash flows, third, when the extremity differs between earnings and cash flows, the moderate variable is superior to the other extreme variable in explaining security returns. These results suggest that earnings are definitely more value relevant than cash flows. However, only in cases when cash flows from operations are moderate and earnings are extreme, cash flows possess higher information content than earnings. Practical implications – The explanatory power for stock returns will be higher for earnings or cash flows depending on which is more highly persistent. This result reverses the conventional finding of the superiority of earnings over cash flows in explaining security returns. Originality/value – In contrast to previous studies, the authors control for the extremity of earnings and cash flows when evaluating the relative information content of earnings and cash flows from operations.

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