This paper investigates whether there is evidence of the accrual anomaly (Sloan, 1996) in Australia, whereby investors overestimate the impact of accruals on the persistence of earnings. While our results provide general support for the existence of the anomaly in Australia, there are a number of idiosyncrasies. First, there is evidence of Australian investors underestimating the persistence of earnings. Second, there is evidence of investors incorrectly assessing the implications of accruals and cash flows for the persistence of earnings (i.e. an accrual anomaly and a cash-flow anomaly). Third, returns to a hedged portfolio trading strategy based on reported accruals are decreasing over the three-year period subsequent to portfolio formation. Furthermore, they are statistically significant only in the first year. Additional analysis of the hedge portfolio results indicates that these results are primarily attributable to a limited number of firm-year observations in the extreme positive tail of returns.
- Accrual anomaly
- Financial reporting