Working paper
Reconciling Growth and Persistence as Explanations for Accrual Mispricing
Johnson School Research Paper Series, Vol.11-09
SSRN
03/01/2008
DOI: 10.2139/ssrn.1117739
Abstract
This paper examines the circumstances under which a growth explanation or a persistence explanation is a more likely explanation for accrual mispricing and whether accruals or cash from operations is a better measure of the mispricing. We hypothesize that mispricing of growth and a fixation on earnings are both descriptive of the accrual mispricing, but that they affect prices differently depending on where the firm is in its life cycle. We also hypothesize that the mispricing will have a stronger association with accruals or cash flows depending on which explanation drives the mispricing. Our results show that the orthogonal information in accruals is more related to growth characteristics, while the orthogonal information in cash flows is related to earnings persistence. Furthermore, in the growth stage, information in accruals is mispriced to a greater extent than the information in cash flows. Collectively, our results suggest that the investment-based explanation for accrual mispricing dominates in the growth stage and is best measured using accruals (and not operating cash flows). In contrast, the persistence explanation for accrual mispricing is more descriptively valid at maturity and decline, and the information contained in operating cash flows subsumes the information contained in accruals regarding earnings persistence
Details
- Title: Subtitle
- Reconciling Growth and Persistence as Explanations for Accrual Mispricing
- Creators
- Paul Hribar - University of IowaNir Yehuda - University of Delaware
- Resource Type
- Working paper
- Publication Details
- Johnson School Research Paper Series, Vol.11-09
- Publisher
- SSRN
- DOI
- 10.2139/ssrn.1117739
- Number of pages
- 42 pages
- Language
- English
- Date posted
- 03/01/2008
- Academic Unit
- Accounting
- Record Identifier
- 9984380600002771
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