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the measurement perspective on decision usefulness
net income=operating cash flows+-net accruals
giúp em dịch đoạn này nữa thì tốt
Sloan points out that, other things equal, the efficient market should react more strongly to a dollar of good news in net income if that dollar comes from operating cash flow than from accruals.
The reason is familiar from elementary accounting—accruals reverse. Thus, looking ahead, a dollar of operating cash flow this period is more likely to be repeated next period than a dollar of accruals, since the effects of accruals on earnings reverse in future periods. In other words, cash flow is more persistent. Sloan estimated separately the persistence of the operating cash flows and accruals components of net income for the firms in his sample, and found that operating cash flows had higher persistence than accruals. That is, consistent with the above “accruals reverse” argument, next year’s reported net income was more highly associated with the operating cash flow component of the current year’s income than with the accrual component
If this is the case, we would expect the efficient market to respond more strongly to the GN or BN in earnings the greater is the cash flow component relative to the accrual component in that GN or BN, and vice versa. Sloan found that this was not the case. While the market did respond to the GN or BN in earnings, it did not seem to “fine-tune” its response to take into account the cash flow and accruals composition of those earnings. Indeed, by designing an investment strategy to exploit the market mispricing of shares with a high or low accruals component in earnings, Sloan demonstrated a one-year return of 10.4% over and above the market return. Sloan’s results raise further questions about securities market efficiency.
Discussion of Efficient Securities Market Anomalies Numerous investigators have tried to explain anomalies without abandoning efficient securities market theory. One possibility is risk. If the investment strategies that appear to earn anomalous returns identify firms that have high betas, then what appear to be arbitrage profits are really a reward for holding risky stocks. The authors of the above three anomaly studies were aware of this possibility, of course, and conducted tests of the riskiness of their investment strategies. In all cases, they concluded that risk effects were not driving their results.
However, others have investigated the risk explanation. Greig (1992) reexamined the OP results and concluded that their excess returns were more likely due to the effects of firm size on expected returns than on the failure of the market to fully evaluate accounting information. The evidence of Fama and French (1992) suggests that firm size explains share returns in addition to beta (see Section 6.2.3. See also Banz (1981)). On the basis of more elaborate controls for firm size than in OP, Greig’s results suggest that OP’s excess returns go away when size is fully taken into account.
Stober (1992) confirmed excess returns to the OP investment strategy. He showed, however, that the excess returns continued for up to six years following the release of the financial statements. If the OP excess returns were due to a deviation of share prices from their efficient market value, one
would hardly expect that it would take six years before the market caught on. In other words, while the market may wait until the information in financial ratios shows up in earnings, this would hardly take six years. This suggests that the OP results reflect some permanent difference in expected returns such as firm size or risk rather than a deviation from fundamental value
Different results are reported by Abarbanell and Bushee (1998), however. In a large sample of firms over the years 1974–1988, they also documented an excess return; to a strategy of buying and shortselling shares based on non-earnings financial statement information such as changes in sales, accounts receivable, inventories, and capital expenditures. Unlike Stober, however, the excess returns did not continue beyond a year, lending support to OP’s results.
Another possible explanation for the anomalies is transactions costs. The investment strategies required to earn arbitrage profits may be quite costly in terms of investor time and effort, requiring not only brokerage costs but continuous monitoring of earnings announcements, annual reports, and
market prices, including development of the required expertise. Bernard and Thomas (1989) present some evidence that transactions costs limit the ability of investors to exploit post-announcement drift. Thus, their 18% annual return, as well as the 14.53% over two years reported by Ou and Penman, and Sloan’s 10.4% may appear to be anomalous only because the costs of the investment strategies required to earn them are at least this high.
If we accept this argument, securities market efficiency can be reconciled with the anomalies, at least up to the level of transactions costs.To put it another way, we would hardly expect the market to be efficient with respect to more information than it is cost-effective for investors to acquire.
The problem with a transactions cost-based defence of efficiency, however, is that any apparent anomaly can be dismissed on cost grounds. If cost is used to explain everything, then it explains nothing. That is, unless we know what the costs of an investment strategy should be, we do not know whether the profits earned by that strategy are anomalous. We conclude that the efficient securities market anomalies continue to raise challenging questions about the extent of securities market efficiency.
the measurement perspective on decision usefulness
net income=operating cash flows+-net accruals
giúp em dịch đoạn này nữa thì tốt
Sloan points out that, other things equal, the efficient market should react more strongly to a dollar of good news in net income if that dollar comes from operating cash flow than from accruals.
The reason is familiar from elementary accounting—accruals reverse. Thus, looking ahead, a dollar of operating cash flow this period is more likely to be repeated next period than a dollar of accruals, since the effects of accruals on earnings reverse in future periods. In other words, cash flow is more persistent. Sloan estimated separately the persistence of the operating cash flows and accruals components of net income for the firms in his sample, and found that operating cash flows had higher persistence than accruals. That is, consistent with the above “accruals reverse” argument, next year’s reported net income was more highly associated with the operating cash flow component of the current year’s income than with the accrual component
If this is the case, we would expect the efficient market to respond more strongly to the GN or BN in earnings the greater is the cash flow component relative to the accrual component in that GN or BN, and vice versa. Sloan found that this was not the case. While the market did respond to the GN or BN in earnings, it did not seem to “fine-tune” its response to take into account the cash flow and accruals composition of those earnings. Indeed, by designing an investment strategy to exploit the market mispricing of shares with a high or low accruals component in earnings, Sloan demonstrated a one-year return of 10.4% over and above the market return. Sloan’s results raise further questions about securities market efficiency.
Discussion of Efficient Securities Market Anomalies Numerous investigators have tried to explain anomalies without abandoning efficient securities market theory. One possibility is risk. If the investment strategies that appear to earn anomalous returns identify firms that have high betas, then what appear to be arbitrage profits are really a reward for holding risky stocks. The authors of the above three anomaly studies were aware of this possibility, of course, and conducted tests of the riskiness of their investment strategies. In all cases, they concluded that risk effects were not driving their results.
However, others have investigated the risk explanation. Greig (1992) reexamined the OP results and concluded that their excess returns were more likely due to the effects of firm size on expected returns than on the failure of the market to fully evaluate accounting information. The evidence of Fama and French (1992) suggests that firm size explains share returns in addition to beta (see Section 6.2.3. See also Banz (1981)). On the basis of more elaborate controls for firm size than in OP, Greig’s results suggest that OP’s excess returns go away when size is fully taken into account.
Stober (1992) confirmed excess returns to the OP investment strategy. He showed, however, that the excess returns continued for up to six years following the release of the financial statements. If the OP excess returns were due to a deviation of share prices from their efficient market value, one
would hardly expect that it would take six years before the market caught on. In other words, while the market may wait until the information in financial ratios shows up in earnings, this would hardly take six years. This suggests that the OP results reflect some permanent difference in expected returns such as firm size or risk rather than a deviation from fundamental value
Different results are reported by Abarbanell and Bushee (1998), however. In a large sample of firms over the years 1974–1988, they also documented an excess return; to a strategy of buying and shortselling shares based on non-earnings financial statement information such as changes in sales, accounts receivable, inventories, and capital expenditures. Unlike Stober, however, the excess returns did not continue beyond a year, lending support to OP’s results.
Another possible explanation for the anomalies is transactions costs. The investment strategies required to earn arbitrage profits may be quite costly in terms of investor time and effort, requiring not only brokerage costs but continuous monitoring of earnings announcements, annual reports, and
market prices, including development of the required expertise. Bernard and Thomas (1989) present some evidence that transactions costs limit the ability of investors to exploit post-announcement drift. Thus, their 18% annual return, as well as the 14.53% over two years reported by Ou and Penman, and Sloan’s 10.4% may appear to be anomalous only because the costs of the investment strategies required to earn them are at least this high.
If we accept this argument, securities market efficiency can be reconciled with the anomalies, at least up to the level of transactions costs.To put it another way, we would hardly expect the market to be efficient with respect to more information than it is cost-effective for investors to acquire.
The problem with a transactions cost-based defence of efficiency, however, is that any apparent anomaly can be dismissed on cost grounds. If cost is used to explain everything, then it explains nothing. That is, unless we know what the costs of an investment strategy should be, we do not know whether the profits earned by that strategy are anomalous. We conclude that the efficient securities market anomalies continue to raise challenging questions about the extent of securities market efficiency.
