Earnings, accruals, and cash flows in the United States food supply chain

Recent research suggests that investors and financial analysts systematically fail to fully interpret relevant information revealed on firms' financial statements. Sloan (1996) developed the accrual anomaly problem, which predicts a systematically negative relationship between accruals, the difference between earning and cash, and future abnormal returns in the U.S. stock market. A potential explanation to this problem, termed the fixation hypothesis, states that investors are too current-oriented or naively fixated towards earnings and do not fully recognize the information in accruals and cash flow. While the accrual anomaly has been extensively investigated there is no consensus yet on why this problem is observed in the U.S. market. The prevalent hypothesis is still the fixation hypothesis. Current research debates the underlying phenomenon behind the accrual anomaly.;In my study, the accrual anomaly is documented as present in the U.S. food supply chain, a subset representing around 8% of the U.S. market. An economic-based explanation of the results is provided. Evidence is found that agribusinesses with high accruals manipulate earnings misleading the market and yielding negative abnormal returns in the subsequent period. Results also suggest that agribusinesses with low accruals constitute a subset of firms with poor past economic performance sending signals to the market, through accruals, that their hard financial times are over. The complex nature of firms with low accruals, however, makes it difficult for the market to make correct predictions. This possible explains the inconsistent results in previous studies (i.e. the sign of abnormal returns for firms with low accruals varies from sample to sample in the current literature).