Accrual Anomaly: Existence And Cause

Efficient Market Hypothesis and the Capital Asset Pricing Model, as the foundation of accounting research in capital market, play very important role in modern accounting research and greatly promote the development of empirical accounting. However, since the eighties of the twentieth century, many scholars have found a lot of anomalies (Anomaly, such as: the value of vision and scale of vision, etc.) that cann't be explained by Effective Markets Hypothesis and Capital Asset Pricing Model, some anomalies indicate that the asset price or return on investment sometimes show certain regularity, or asset prices can be predicted to some extent, some anomalies show that the asset price is much higher than the "normal" level accordance with the CAPM or other rational expectations models.The accrual anomaly in this dissertation is found by Sloan(1996),it is the phenomenon that accrual negatively correlates with future stock returns and a trading strategy using accarul information generates positive abnormal stock returns.In the study of Sloan (1996), earnings performance attributable to the accrual component of earnings exhibits lower persistence than earnings performance attributable to the cash flow component of earnings. He indicates that stock prices act as if investors fail to distinguish fully between the different properties of the accrual and cash flow components of earnings. Consequently, firms with relatively high (low) levels of accruals experience negative (positive) future abnormal stock returns, a trading strategy taking a long position in the stock of firms reporting relatively low levels of accruals and a short position in the stock of firms reporting relatively high levels of accruals generates positive abnormal stock returns.So, Sloan(1996) interpreted the accrual anomaly based on the point of earning persistence. Following Sloan's ideas, some researchers explain accrual anomaly according to earning persistence.There are mainly three questions in demostic research on accrual anomaly: First, the conclusions are different that the relationship between accrual and future stock returns; Second, in different studies, abnormal stock returns, generated by the trading strategy using accrual information, are different. Third, demostic research on accrual anomaly is all following Sloan's idea, but the reliability of the model of Sloan (1996) may decrease when considering relevant factors. To solve these problems, this dissertation mainly studies following two themes:First, the existence of accrual anomlay. This theme mainly discusses these questions: What is the relationship between accrual and furure stock returns in China's capital market? What cause the difference in the abnormal stock returns in different studies? Why do some studies show that the relationship between accrual and the future stock returns is positive, while it is negative in other studies? Do profit and loss have a significant impact on accrual anomaly?Second, the cause of the accrual anomaly.Since the reliability of the model of Sloan (1996) may decrease when considering relevant factors, it is necessary to interprete the accrual anomaly from other perspective.This dissertation analyses why corporate growth is a driver of the accrual anomaly.There are seven chapters in the dissertation:Chapter One: Introduction. This part introduces the research background, structure and ideas, research methods, innovation and limitation.Chapter Two: Theoretical Basis.They are: efficient market theory, capital asset pricing model and behavioral finance theory.Chapter Three: Literature Review.This part reviews the two fields of accrual anomaly: the cause of accrual anomaly and other studies about accrual anomaly.Chapter Four: Research Hypothesis.There are two aspects: hypothesis about the existence of accrual anomaly and hypothesis about the cause of accrual anomaly.Chapter Five: Research Sample and Defination of Variables.Chapter Six: An Empirical Test. The main empirical results are:1. Accrual negatively correlates with future stock returns in China'a capital market,the abnormal stock returns, generated by a trading strategy taking a long position in the stock of firms reporting relatively low levels of accruals and a short position in the stock of firms reporting relatively high levels of accruals,is about 10%.These results approve the existence of accrual anomaly in China's capital market, the reason of different conclusions in former studies may lie in the different sample or the different method in caculating accrual.2. Accrual positively correlates with growth index (GI), equty growth (EG), sales growth (SG), investment growth (IG) and asset growth (AG).3. Current stock returns positively correlates with corporate growth level, and also positively correlates with past and current stock returns.4.Corporate growth rates are strong predictors of future abnormal returns,corporate with high growth rate has lower stock returns in the future,while corporate with lower growth rate has higher stock returns in the future,it is caused by the overreaction and reaction-insufficiency of the investor.5. The magnitude of the accrual anomaly monotonically increases with the covariation between accruals and corporate growth, and also increases with the covariations of accruals with past and current stock returns.Chapter Seven: Conclusion and revelation.The innovations of this dissertation are as following:First, New research perspective. Most relevant studies follow Sloan's ideas(1996),that is earning persistence.In the dissertation,I indicate that the essence of accrual is a part of asset change and reflect corporate growth,then study the relation between corporate growth and accrual anomaly, empirical results suggest that corporate growth is a driver of the accrual anomaly.Second, Put forward the suggestion to perfect Sloan's model(1996). Sloan's model (1996) is built on the basis of certain assumptions,namely, the future stock returns of the company is only impacted by the size and unexpected earnings,I think the assumption has some limitation,so, it may be the model that leads to the conclusion that the market can not distinguish the difference of persistence between accrual and cash flow,thus we can perfect Sloan's model(1996) using the relationship between accrual and corporate growth.Third,Put forward a new index to appraise corporate growth—Coroprate Growth Index.Traditional indexes reflecting corporate growth are: sale growth rate,total asset growth rate,equty growth rate and investment growth rate,but these indexes have limitation,that is ,they only measure one aspect of the corporate growth,in the dissertation, factor analysis is used to condense traditional indexes,the production of factor analysis ,Corporate Growth Index, reflects corporate growth comprehensively.