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

Listed author(s):
  • 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)

Registered author(s):

    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.

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    Paper provided by Universidade do Porto, Faculdade de Economia do Porto in its series CEF.UP Working Papers with number 1107.

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    Length: 38 pages
    Date of creation: Dec 2011
    Handle: RePEc:por:cetedp:1107
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