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Limited attention, statement of cash flow disclosure, and the valuation of accruals

Author

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  • Bin Miao

    (National University of Singapore)

  • Siew Hong Teoh

    (University of California-Irvine)

  • Zinan Zhu

    (National University of Singapore)

Abstract

We test for the effect of limited attention on the valuation of accruals by comparing the immediate and long-term market reactions to earnings announcements between a subsample of firms that disclose only the balance sheet with a subsample of firms that disclose both the balance sheet and the statement of cash flows (SCF) in the earnings press release. Information about accruals generally can be inferred from comparative balance sheets, but the availability of the SCF makes accruals more salient and easier to process for investors with limited attention. Controlling for potential additional information and endogeneity of SCF disclosure, we find strong evidence that SCF disclosure enables more efficient pricing of accruals. Further analyses using a proxy for investor sophistication suggest that, when SCF is absent from the earnings press release, less sophisticated investors fail to discount accruals but sophisticated investors do.

Suggested Citation

  • Bin Miao & Siew Hong Teoh & Zinan Zhu, 2016. "Limited attention, statement of cash flow disclosure, and the valuation of accruals," Review of Accounting Studies, Springer, vol. 21(2), pages 473-515, June.
    • Handle: RePEc:spr:reaccs:v:21:y:2016:i:2:d:10.1007_s11142-016-9357-z
    DOI: 10.1007/s11142-016-9357-z
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    More about this item

    Keywords

    Limited attention; Cash flow disclosure; Voluntary disclosure; Accrual valuation; Salience; Information processing cost;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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