Accrual Reliability, Earnings Persistence And Pricing

This paper first exams if Chinese companies have the same phenomenon that the accrual component of profitability is less persistent than the cash flow component, and we find it is the same case in china. Research(Sloan,1996)shows that a higher proportion of accruals relative to cash earnings is associated with lower earnings performance in the subsequent period, in which research, accruals mainly refer to working capital accrual. While our results indicate that information in accruals is not restricted to working capital accrual, but also extend to non-current accruals, investing accruals and certain financing accruals. Our evidence indicates that many of the accruals that are omitted are of low reliability, and we encourage subsequent research to incorporate such accruals. We refer to the corresponding accrual categories as the change in non-cash working capital, the change in net non-current operating assets and the change in net financial assets. Then we link accrual reliability to earning persistence and examines the impact of accrual reliability on earnings persistence.Also we have show that both the persistence of earnings and the extent of the associated mispricing, are directly related to the reliability of the underlying accruals.On research we have found:(1)The persistence of the cash flow component of earnings is more persistent than the accrual component of earnings, the persistence coefficients on the accrual components of earnings relative to the cash flow component of earnings will be more small for less reliable accruals. For non-current assets and liability, they will show the nature between reliability and earning persistent in a long time. (2)Market have functional fixation at earning, earning can explain 10.5% of cumulated abnormal return, the cash flow only can explain 0.9% of cumulated abnormal return. Earning can show more information than cash flow.(3)We find that the earning and the cash flow from operation have incremental information content over each other. But the cash flow cannot improve model to explain returns. the accruals and the cash flow from operation have incremental information content over each other. The change in non-cash working capital, the change in net non-current operating assets and the change in net financial assets have incremental information content over the cash flow. The change in net non-current operating assets can improve model to explain returns. But the change in non-cash working capital and the change in net financial assets cannot improve model to explain returns. Investor give a mispricing on accruals, they cannot recognize the impact of accruals reliability on earnings persistence.