Abstract
The study examine whether the stock prices can reflect the information of future earnings contained in the accrual components of the current period. The magnitude of accruals component determines the extent to which the current earnings performance persists in the future. However, the current earnings show that the investors hardly reflect the information contained in the accruals components. All listed and non-listed companies (662) on Karachi Stock Exchange, form January 1993 to December 2015 are incorporated in the study. The study concluded that accruals anomaly does not exist in the Karachi Stock Exchange. Which implies that an investor who follows an investment strategy on the basis of accruals will not earn excess returns. Moreover, it implies the Capital Asset Pricing Model is a valid model to capture the effect of accruals.
Highlights
Market's inability to predict the existing pattern always brings an opportunity for investors to earn the excess profit
In the context of weighted portfolio returns the accruals based strategy works on Karachi Stock Exchange but after the robust results, we study the different evidences
This work is a contribution toward the existing literature by testing the effect of accrual as portfolio investment strategy in Karachi stock exchange (KSE)
Summary
Market's inability to predict the existing pattern always brings an opportunity for investors to earn the excess profit. Accruals and cash flows from operations are important aspects of finance. These two factors are very important for estimating the future earnings. In the case of Pakistan, there is limited research explaining the properties of the accruals. It is a first comprehensive study which helps the investors to make better decisions. A common investor forecast future earning of a firm without taking accruals into account. These patterns are hard to predict by using a simple asset pricing model. The study uses CAPM to test the efficiency of portfolios on KSE
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