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On the persistence and pricing of industry-wide and firm-specific earnings, cash flows, and accruals

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  • Hui, Kai Wai
  • Nelson, Karen K.
  • Yeung, P. Eric

Abstract

Economic theory suggests that the industry-wide component of firm performance is more persistent than the firm-specific component. This paper provides evidence on this assertion and tests whether investors misprice these components of earnings. Consistent with predictions, we find greater persistence in the industry-wide component of earnings that is not fully recognized in stock prices. We show that these effects are partially driven by the market׳s inability to recognize the differential persistence of industry-wide earnings in homogenous industries or in the presence of a large business shock. Finally, we show that industry-wide cash flows is the most persistent component of earnings while firm-specific accruals is the least persistent, suggesting that economic fundamentals and accounting constructs are jointly informative about firms׳ future earnings. The market predictably misprices these components, however, significantly underweighting the persistence of industry-wide cash flows and overweighting the persistence of firm-specific accruals.

Suggested Citation

  • Hui, Kai Wai & Nelson, Karen K. & Yeung, P. Eric, 2016. "On the persistence and pricing of industry-wide and firm-specific earnings, cash flows, and accruals," Journal of Accounting and Economics, Elsevier, vol. 61(1), pages 185-202.
    • Handle: RePEc:eee:jaecon:v:61:y:2016:i:1:p:185-202
    DOI: 10.1016/j.jacceco.2015.06.003
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    More about this item

    Keywords

    Accruals; Cash flows; Earnings; Persistence; Stock returns;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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