اقلام تعهدی، جریان های نقدی و بازده سهام مصالح
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Publisher : Elsevier - Science Direct (الزویر - ساینس دایرکت)
Journal : Journal of Financial Economics, Volume 91, Issue 3, March 2009, Pages 389–406
This paper examines whether the firm-level accrual and cash flow effects extend to the aggregate stock market. In sharp contrast to previous firm-level findings, aggregate accruals is a strong positive time series predictor of aggregate stock returns, and cash flows is a negative predictor. In addition, innovations in accruals are negatively contemporaneously correlated with aggregate returns, and innovations in cash flows are positively correlated with returns. These findings suggest that innovations in accruals and cash flows contain information about changes in discount rates, or that firms manage earnings in response to marketwide undervaluation.
Aggregate stock returns,Accruals,Cash flows,Discount rates,Behavioral finance,بازده سهام مصالح,اقلام تعهدی,جریان های نقدی,نرخ تخفیف,امور مالی رفتاری
نتیجه گیری انگلیسی
There is strong and robust evidence that the level of accruals is a negative cross-sectional predictor of abnormal stock returns (Sloan, 1996). The accrual anomaly has been extended and applied in numerous papers in financial economics and accounting. Furthermore, there is evidence that the other component of earnings, cash flows, is a positive cross-sectional predictor of returns (Desai, Rajgopal, and Venkatachalam, 2004; Pincus, Rajgopal, and Venkatachalam, 2007). In this paper, we test whether the accrual and cash flow effects extend to the market level, and whether the behavioral explanation for the firm-level effects can explain our aggregate evidence. In addition to examining whether aggregate accruals and aggregate cash flows predict aggregate stock returns, we test whether innovations in aggregate accruals and aggregate cash flows are contemporaneously associated with aggregate returns, as would be implied if accrual innovations and cash flow innovations are correlated with shifts in discount rates. An explanation that has been offered for the firm-level accrual and cash flow effects, the earnings fixation hypothesis, holds that naïve investors fixate on earnings and fail to attend separately to the cash flow and accrual components of earnings. Since the cash flow component of earnings is a more positive forecaster of future earnings than the accrual component of earnings (Sloan, 1996), investors who neglect this distinction become overly optimistic about the future prospects of firms with high accruals but low cash flows, and overly pessimistic about the future prospects of firms with low accruals but high cash flows.1 As a result, high accrual and low cash flow firms become overvalued, and subsequently earn low abnormal returns. Similarly, low accrual and high cash flow firms become undervalued, and are followed by high abnormal returns. But does a high level of aggregate accruals induce overvaluation of the entire stock market? Some commentators allege that during certain periods, such as the market boom of the late 1990s, firms managed earnings aggressively, and that auditors and regulators were compliant, thereby allowing firms to increase their earnings relative to underlying cash flows. Also, there is general evidence of aggregate variations in new issue activity, and that firms tend to manage earnings upward prior to new issues (Teoh, Welch, and Wong, 1998). Alternatively, it could be that earnings management is primarily firm-specific, with an aim at achieving managerial goals such as smoothing the firm-specific deviations of earnings performance from that of industry peers. Even in the absence of aggregate fluctuations in earnings management, we expect to see aggregate variations in accruals, because macroeconomic fluctuations affect firms’ operating and reporting outcomes. For example, increases in aggregate demand over the business cycle could lead to increased purchases from firms, which would be manifested in part by an increase in receivables.2 Furthermore, when consumer confidence is high or when macroeconomic conditions make credit easy, consumers may buy more on credit, increasing aggregate receivables. Alternatively, if firms expect a future rise in aggregate demand, they may accumulate inventories in anticipation, which again are accounted for as positive accruals.3 Just as accruals and cash flows have different implications for future earnings performance at the firm level, aggregate accruals and aggregate cash flows can differ in their implications for future aggregate earnings. If aggregate accruals is a less favorable predictor than aggregate cash flows of future aggregate earnings, and if investors neglect the distinction between cash flows and accruals, then high aggregate accruals will cause overvaluation of the stock market, and therefore will predict low subsequent returns. In addition, high aggregate cash flows will predict high subsequent returns. To test these hypotheses, we estimate the abilities of aggregate accruals versus cash flows to predict future aggregate earnings, and test whether the levels of aggregate accruals and cash flows are predictors of aggregate stock returns. A possible reason to question whether the accrual and cash flow effects will extend to the aggregate level is that investors and macro analysts devote considerable effort to studying the market as a whole, and information costs and arbitrage costs are less significant at the aggregate level. On the other hand, several authors argue that markets should be more efficient in setting the relative prices of stocks than in setting the price level of the aggregate market.4 Empirically, some firm-level effects (such as poor return performance after equity issuance) do extend to the aggregate level (Baker and Wurgler, 2000), whereas others (such as the post-earnings announcement drift effect, PEAD) become much weaker (Kothari, Lewellen, and Warner, 2006). It is therefore an empirical question whether the accrual and cash flow effects hold in the time series at the aggregate level. An alternative to the earnings fixation hypothesis is that at the aggregate level accruals and cash flows are correlated with rational variations in discount rates. Since both accruals and cash flows are related to shifts in demand, inventories, and investment activity, a natural hypothesis is that they are associated with business cycle shifts in risk premiums. It is therefore important to control for variables that are associated with business cycle fluctuations and possible shifts in discount rates. In our aggregate earnings persistence regressions, we find that the accrual component of aggregate earnings is less persistent than the cash flow component, with a difference in coefficients that is much larger than that in the firm-level regressions of Sloan (1996). Thus, the earnings fixation hypothesis at the aggregate level predicts that aggregate accruals will negatively predict aggregate returns, and that aggregate cash flows will positively predict aggregate returns. We then test the abilities of aggregate accruals and aggregate cash flows to predict aggregate returns using both univariate regressions, and multivariate regressions that control for several business cycle variables that have been proposed as return predictors in past literature. In sharp contrast with the well-known firm-level findings, we find that for the 1965–2005 period, the level of aggregate accruals is a strong positive predictor of aggregate stock returns. Furthermore, the level of aggregate cash flows is a strong negative predictor of aggregate returns. Our multivariate regressions control for several forecasting variables suggested in past literature: the aggregate dividend-to-price ratio, the aggregate earnings-to-price ratio, the accounting rate of return (earnings/assets), the aggregate book-to-market ratio, the default spread on corporate bonds, the term spread on Treasuries, the equity share in aggregate new issues, and the short-term interest rate.5 These controls can be viewed as possible proxies for discount rates, since they reflect shifts in aggregate business cycles and business conditions. For example, the default spread reflects expectations of risk of defaults; the term spread reflects (among other things) expectations about inflation; and the aggregate earnings-to-price ratio, aggregate accounting rate of return, aggregate dividend-to-price ratio, and aggregate book-to-market ratio should correlate with market beliefs about corporate growth prospects. In the multivariate regressions, the level of aggregate accruals continues to positively and significantly predict aggregate stock returns, and the level of aggregate cash flows continues to negatively predict aggregate returns. Taking the univariate and multivariate regression results together, the evidence indicates that accruals is a positive time series predictor, and cash flows is a negative time series predictor, of aggregate stock returns. These results are inconsistent with the prediction of the earnings fixation hypothesis at the aggregate level, and are of the opposite signs from the firm-level effects associated with accruals and cash flows. An alternative risk-based explanation for the aggregate return predictability of accruals and cash flows is that high aggregate accruals or low aggregate cash flows are associated with high levels of risk (implying a high expected stock return), above and beyond any risks captured by our controls. To evaluate this explanation, in a similar spirit to Kothari, Lewellen, and Warner (2006), we perform univariate and multivariate tests of the relation between innovations in aggregate accruals and cash flows and contemporaneous stock returns. We find that innovations in aggregate accruals are negatively related to contemporaneous aggregate returns, and innovations in aggregate cash flows are positively related to contemporaneous aggregate returns, even after controlling for innovations in other discount rate proxies. These findings suggest that positive innovations in accruals or negative innovations in cash flows are associated with heavier discounting of future profits, which leads to a decline in the stock market. Since accruals and cash flows are components of earnings, the above findings are also consistent with the findings of Kothari, Lewellen, and Warner (2006) and Sadka (2007) that aggregate earnings surprises are negatively contemporaneously correlated with aggregate stock returns.6 Our analyses show that the negative relation between earnings surprises and aggregate returns derives primarily from the accrual component of the earnings surprises, rather than from the surprises in cash flows.7 Indeed, cash flow surprises seem to have a dampening effect on the negative earnings/return relation identified by Kothari, Lewellen, and Warner (2006). To gain further insight into firm-level versus aggregate-level effects, we also examine the abilities of accruals and cash flows to predict earnings and returns at the sector and industry levels. We find that accruals and cash flows positively predict returns in some sectors and industries (especially in High Tech), and negatively in others. However, the patterns across sectors and industries of return predictability do not align closely with the differences in the abilities of accruals versus cash flows to predict future earnings. Thus, the evidence provides little support for the earnings fixation hypothesis at the industry and sector levels as well as at the aggregate level. There are other papers that test whether firm-level cross-sectional return predictors also predict returns in the time series. For example, Kothari and Shanken (1997), Pontiff and Schall (1998), and Lewellen (1999) provide evidence that book-to-market ratio predicts the returns on the market portfolio and size- and book-to-market-sorted portfolios. Kothari, Lewellen, and Warner (2006), or KLW, test whether the PEAD effect (Bernard and Thomas, 1990), in which firm-level earnings surprises are on average followed by a continuation of stock returns over the next nine months, extends to the aggregate level. KLW find little evidence of drift in the stock market as a whole in response to aggregate earnings surprises, in contrast with the firm-level evidence. KLW also provide evidence of a negative contemporaneous relation between aggregate earnings surprises and stock returns, consistent with aggregate earnings surprises being correlated with shifts in discount rates. The behavioral explanation for the PEAD effect is that investors neglect the information contained in earnings, or do not understand the time series properties of earnings surprises. The behavioral hypothesis for the accrual and cash flow effects is that naïve investors fixate on earnings while neglecting the information contained in different components of earnings (cash flows versus accruals). Thus, our paper and KLW's provide complementary examinations of whether firm-level effects that have been attributed to investor psychology extend to the aggregate level. Our paper is not a direct test of whether the behavioral earnings fixation hypothesis explains the firm-level accrual and cash flow effects. However, it does provide out-of-sample evidence about the extent to which the behavioral theory used to explain the firm-level findings explains a broader range of stylized facts. Our findings at a minimum suggest a limit to the scope of the earnings fixation theory. In the conclusion of the paper we discuss possible ways to reconcile the firm-level and aggregate time series findings. The remainder of this paper is structured as follows. Section 2 describes the data and empirical methods. Section 3 examines the abilities of aggregate accruals and cash flows to predict aggregate earnings and returns. Section 4 examines the contemporaneous relations between innovations in accruals and cash flows and aggregate returns. Section 5 presents evidence of accruals and cash flows as a predictor of sector- and industry-level earnings and returns. Section 6 concludes.