A REVISIT OF ACCRUAL ANOMALY – SINGAPORE EVIDENCE

Abstract

Based on Singapore market, this study analyses whether information content of cash flow and accrual components of earnings is systematically different and whether the stock prices fully reflect this information. Using the share price data and accounting data, we conduct an analysis on the persistence of earnings as well as the persistence of different components of earnings i.e. cash and accrual components. In addition, by using the abnormal return which is computed by subtracting market return (STI return) from the raw return over the holding period, we conduct an analysis on the market reaction to earnings and components of earnings to understand if the market rationally anticipates their persistence correctly. Our findings show that earnings attributable to cash flow component are more persistent than earnings attributable to accrual component. Further analysis of the relationship between future abnormal returns and components of earnings (accrual and cash flow components) shows that market has failed to anticipate rationally the persistence of accrual and cash components of earnings. Our finding instead shows that share prices act as if investors anticipate too high the persistence of earnings performance attributable to both the accrual and cash flow components. Lastly, simulated trading strategy with a long position in the shares of firms reporting relatively low accruals in the current financial statement and a short position in the shares of firms reporting relatively high accruals in the current period is carried out to determine if it generates positive abnormal returns. Our finding confirms that positive abnormal return can be obtained from carrying out such trading strategy.