Abstract
This paper investigates the return implications of the cash flows and accruals components of unexpected earnings. We find that unexpected cash flows have greater persistence than unexpected accruals, and that this difference is driven primarily by loss firms. We also find that markets appear to react more (less) strongly to the unexpected cash flow (accrual) component of total unexpected earnings, but that only firms that beat both earnings expectations and cash flow expectations are rewarded with higher returns. These results are consistent with at least some fixation on the total earnings number, to the exclusion of more economically important cash flow surprises. Finally, we find that the mispricing of accruals and cash flows is concentrated in loss firms. Since these firms frequently have negative unexpected earnings components, the overpricing of these components implies that these firms may be punished too much for disappointing earnings, causing the firms to be underpriced.
Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
