Accruals Anomaly and Cash Flows Anomaly: Evidence in France
- November 10, 2020
- Posted by: RSIS Team
- Categories: Banking & Finance, IJRSI
International Journal of Research and Scientific Innovation (IJRSI) | Volume VII, Issue X, October 2020 | ISSN 2321–2705
Accruals Anomaly and Cash Flows Anomaly: Evidence in France
Fatma JADLAOUI1, Slaheddine HALLARA2
1Institut supérieur d’administration des entreprises Gafsa TUNISIE
2Institut supérieur de gestion de TUNIS Bardo, TUNISIE
Abstract: The accruals anomaly and cash flows anomaly appear as an irregularity in financial markets. The results of previous empirical studies challenge the paradigm of financial market efficiency (Sloan 1996; Shi and Zhang 2011; Houge and Loughran 2000). The anomaly seems to be derived from users’ inability to recognise effect of accruals and cash flows on stock income. Prior literature revue, supports that the abnormal accruals and cash flows that are strong and solid in different context (Lafond 2005; Pincus et al. 2007). To address this issue, we conducted a study on a sample of 185 French firms over the period from 1998 to 2008. The results show that there is no evidence of the cash flow anomaly in France. But, we detect the existence of the accruals anomaly.
Keywords: Anomaly; accruals; cash flows; managerial discretion.
I. INTRODUCTION
Financial market anomalies have attracted the attention of several accounting and financial researchers (e.g. the post earnings announcement drift, Ball and Brown 1968; accruals anomaly, Sloan 1996) and several market participants. Xie (2001) finds that these anomalies are challenges to financial market theories. Investors are also interested in these anomalies in order to make abnormal profits.
Sloan (1996) states that in the U.S. capital markets, an investment strategy based on accruals generates a significant abnormal stock market return for the following year. These results run counter to the efficiency of the capital market.
Several studies ensure that the accruals anomaly is robust in various samples of US firms (Collins and Hribar, 2000; Bradshaw et al. 2001; Zach, 2003; Pincus et al. 2007).
Houge and Loughran (2000) identified, in a US capital market, that a cash-flow based investment strategy, can generate an excess stock market returns. Thus, the mispricing test of operating cash flows is a logical extension of the accruals anomaly.
These results assume that investors systematically commit a cognitive error when evaluating the information contained in the earnings. According to the functional fixation hypothesis, investors focus on earnings and are not interested in the choices underlying its elaboration.
The determination of earnings depends on the accounting method used. Due to regulatory framework, managers have discretionary options to make different interpretations in the production of accounting information.
