A Tale of Two Strategies: Cash Flow, Accruals and the Role of Investor Sentiment

Going, Going, Gone? The Demise of the Accruals Anomaly

“…In a non-log scale, an increase in asset value in period t of say 50% followed by a decrease of -50% in period t+1 does not yield the initial asset value (the required increase in period t is 100%). 9 After our research was well underway, we came across studies by Leippold and Lohre (2008) and Gerard, Guido and Koutsoyannis (2009) that report a similar graph to those in Figure 2. In neither case, however, is the research question studied related to either documenting or explaining the demise of Sloan's (1996) annual accruals anomaly.…”

The Differential Impact of Investor Sentiment on the Value Relevance of Book Value Versus Earnings

“…First, prior studies of investor sentiment find that investors overvalue accounting components during high sentiment periods and undervalue them during low sentiment period (Neal and Wheatley 1998;Brown and Cliff2005;Gerard et al 2009;Livnat and Petrovits 2009;Brown et al 2012;Mian and Sankaraguruswamy 2012). I build upon these studies by documenting that investors value book value versus earnings differently depending on whether they are optimistic or pessimistic about the overall market performance.…”

“…In ~eneral, all of these evidences suggest that when investor sentiment increases, the valuation of earnings and accrual increase. Several research suggests that market place optimistic valuations on earnings during periods of high sentiment and place pessimistic valuation on earnings during periods of low sentiment (Gerard et al (2009), Livnat and Petrovits (2009), Brown et al(2012, Mian and Sankaraguruswamy (2012)). Similarly, Livnat and Petrovits (2009) also find that the valuation of accrual is lower in pessimistic period and higher in optimistic period and the valuation eventually reverts in the following period.…”

The differential impact of investor sentiment on the value relevance of book value versus earnings

“…Overall, this paper makes three contributions. First, prior studies of investor sentiment find that investors overvalue accounting components during high sentiment periods and undervalue them during low sentiment period (Neal and Wheatley 1998;Brown and Cliff2005;Gerard et al 2009;Livnat and Petrovits 2009;Brown et al 2012; Mian and Sankaraguruswamy 2012). I build upon these studies by documenting that investors value book value versus earnings differently depending on whether they are optimistic or pessimistic about the overall market performance.…”

“…In ~eneral, all of these evidences suggest that when investor sentiment increases, the valuation of earnings and accrual increase. Several research suggests that market place optimistic valuations on earnings during periods of high sentiment and place pessimistic valuation on earnings during periods of low sentiment (Gerard et al (2009), Livnat and Petrovits (2009), Brown et al(2012), Mian and Sankaraguruswamy (2012)). Similarly, Livnat and Petrovits (2009) also find that the valuation of accrual is lower in pessimistic period and higher in optimistic period and the valuation eventually reverts in the following period.…”