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Is there an accruals or a cash flow anomaly in UK stock returns?


  • Nuno Soares

    () (Faculdade de Engenharia, Universidade do Porto, Portugal and CEF.UP, Faculdade de Economia, Universidade do Porto, Portugal)

  • Andrew W. Stark

    () (Manchester Business School, UK)


In this paper, we apply a modified version of the Mishkin (1983) test to companies in the UK stock market in order to investigate the presence of accruals and cash flow effects on UK firms’ annual returns. First, we find that accruals decile rankings have U-shaped, or inverted U-shaped, or no relationships with most of the risk variables. Accruals decile rankings have, however, a negative relationship with the ratio of research and development to market value which is known to have a positive relationship with returns. Second, regarding the relationship between risk controls and returns, we find evidence associated with an RD effect and some evidence in favour of earnings-price and past return effects. We find little evidence of firm size, book to-market, and firm leverage effects, once the other variables are controlled for. Third, for the period 1990-2007, we report little evidence of general accruals mispricing in the UK in which accruals have a negative relationship with future returns, once risk has been accounted for. Additionally, after treatment of extreme observations, evidence of cash flow mispricing is found for the UK stock market. An alternative interpretation of our results is that there is no separate accruals effect, at least in the way predicted by the conventional mispricing stories, once other effects are taken into account, but there is a separate cash flow effect.

Suggested Citation

  • Nuno Soares & Andrew W. Stark, 2011. "Is there an accruals or a cash flow anomaly in UK stock returns?," CEF.UP Working Papers 1107, Universidade do Porto, Faculdade de Economia do Porto.
  • Handle: RePEc:por:cetedp:1107

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    Cited by:

    1. Doukakis, Leonidas C. & Papanastasopoulos, Georgios A., 2014. "The accrual anomaly in the U.K. stock market: Implications of growth and accounting distortions," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 32(C), pages 256-277.
    2. Papanastasopoulos, Georgios A., 2015. "Accruals, growth, accounting distortions and stock returns: The case of FRS3 in the UK," The North American Journal of Economics and Finance, Elsevier, vol. 33(C), pages 39-54.

    More about this item


    Accruals anomaly; accrual based accounting; cash flows; financial statement analysis;

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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