Value-Glamour and Accruals Mispricing: One Anomaly or Two?

Abstract

We investigate whether the accruals anomaly is a manifestation of the glamour stock phenomenon documented in the finance literature. Value (glamour) stocks, characterized by low (high) past sales growth, high (low) book-to-market (B/M), high (low) earnings-to-price (E/P), and high (low) cash flow-to-price (C/P), are known to earn positive (negative) future abnormal returns. Note that “C” or cash flow is operationalized in the finance literature as earnings adjusted for depreciation. Sloan (1996) shows that firms with low (high) total accruals earn positive (negative) future abnormal returns. We find that a new variable, operating cash flows measured as earnings adjusted for depreciation and working capital accruals, scaled by price (CFO/P) captures mispricing attributed to the four traditional value-glamour proxies and accruals. Interpretation of this finding depends on the reader's priors. If the reader believes that value-glamour phenomenon can be operationalized only as C/P, and not CFO/P, then one would conclude that CFO/P is a parsimonious variable that captures the mispricing attributes of two distinct anomalies, value glamour and accruals. However, if a reader views the value-glamour anomaly broadly as a fundamentals-to-price anomaly, then (1) the CFO/P variable can be considered an expanded value-glamour proxy and; (2) our results are consistent with Beaver's (2002) conjecture that the accruals anomaly is the glamour stock phenomenon in disguise.

Analysts’ accrual-related over-optimism: do analyst characteristics play a role?

“…Consistent with this, Richardson et al (2004) find that analyst forecasts are more optimistic (pessimistic) for high (low) book-to-market firms. Second, high (low) accrual firms are likely to be glamour (value) firms (Desai et al 2004), so it could be argued that accruals proxy for growth, at least to some extent. 15 We also control for the analyst's outstanding stock recommendation, Recom, because prior literature finds greater analyst optimism for firms with hold/sell recommendations (Das et al 1998;Francis and Philbrick 1993).…”

“…Recent studies examining the accrual anomaly suggests that research focusing on accrual mispricing without also considering cash flow mispricing is incomplete(Barone and Magilke 2009;Desai et al 2004;Yu 2007). Analysts' accrual-related over-optimism 61…”

Accrual anomaly in the Brazilian capital market

“…One group of studies relates accrual anomaly with other anomalies, such as the works of Collins and Hribar (2000), Desai, Rajgopal and Venkatachalam (2004), and Fama and French (2008). The first work identified that accrual anomaly is different than post-earnings announcement drift (the tendency for the cumulative abnormal returns of an asset to accompany an earnings surprise for various days after its announcement, due to an overreaction of the market to the result disclosed).…”

“…Sloan (1996) showed that a hedge strategy with a long position in assets of low accruals and a short position in assets of high accruals generates significant abnormal returns. The accrual anomaly has been intensely debated in recent international academic literature in finance (Desai, Rajgopal, & Venkatachalam, 2004;Dopuch, Seethamraju, & Xu, 2010).…”

Do IPO Firms Manage Earnings?

“…report there is strong and robust evidence that the level of accruals is a negative cross-sectional predictor of abnormal stock returns. Desai, Rajgopal, and Venkatachalam (2004), and Pincus, Rajgopal, and Venkatachalam (2007) both document that cash flows is an effective cross-sectional predictor of returns. Ndubizu (2007) reports that cross-listed firms have significant return on assets (ROA), cash flows, and working capital accruals that peak in the listing period, and decrease in subsequent years.…”