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Review of Accounting Studies

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01.03.2012

Can the earnings fixation hypothesis explain the accrual anomaly?

verfasst von: Linna Shi, Huai Zhang

Erschienen in: Review of Accounting Studies | Ausgabe 1/2012

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Abstract

This paper provides empirical evidence on whether the earnings fixation hypothesis can explain the accrual anomaly originally documented in Sloan (1996). Our analytical model yields the prediction that, if investors fixate on reported earnings, the effectiveness of the accrual strategy will increase in the responsiveness of the stock price to earnings and the differential persistence of cash flows relative to accruals. Our empirical evidence confirms our prediction and lends support to the earnings fixation hypothesis.

Nächster Artikel Do initial public offering firms manage accruals? Evidence from individual accounts

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There is conflicting evidence for each of the four explanations; however, a comprehensive review is outside the scope of this paper. Please refer to Richardson et al. (2010) for a more complete review.

Green et al. (2011) provide evidence that the effectiveness of the accrual strategy is related to the capital invested by hedge funds to exploit it. Their evidence is seemingly inconsistent with the risk explanation.

Specifically, we find that the correlation between the measure estimated using data from year t − 8 through year t and the measure estimated using data from year t + 1 through year t + 9 is positive and significant at the 0.01 level, for both the stock price’s responsiveness to earnings (ERC) and the differential persistence of cash flows relative to accruals (PERDIF). In addition, we find that next-year ERC (PERDIF) increases in current ERC (PERDIF). Next-year ERC (PERDIF) is 234% (99) higher for firms in the top decile than for firms in the bottom decile of current ERC (PERDIF).

We obtain similar evidence when we measure the price’s responsiveness to earnings by regressing returns on changes in earnings.

Bens et al. (2003) suggest that managers attempt to manipulate diluted EPS by share repurchases, which implies that the market pays attention to the diluted EPS. In this spirit, we use diluted EPS to estimate stock price responsiveness to earnings. Untabulated results show that using basic EPS instead of diluted EPS to estimate ERC does not change our empirical results.

Kraft et al. (2006) find that this foresight bias improves the performance of the accrual strategy. Among firms without data on next year’s earnings or accruals, the mean and median values of size-adjusted returns are positive (negative) for those classified as high (low) accruals firms.

Section 3.1.3 provides details on how we compute PERDIF.

Our results hold when we form quintiles instead of deciles.

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Titel: Can the earnings fixation hypothesis explain the accrual anomaly?
verfasst von: Linna Shi
Huai Zhang
Publikationsdatum: 01.03.2012
Verlag: Springer US
Erschienen in: Review of Accounting Studies / Ausgabe 1/2012
Print ISSN: 1380-6653
Elektronische ISSN: 1573-7136
DOI: https://doi.org/10.1007/s11142-011-9171-6

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