Persistence and Relevance of Accruals: Evidences from the Brazilian Capital Market

Abstract

The main objective in this research is to analyze the persistence and relevance of accruals, as well as the existence of the accrual anomaly in the Brazilian capital market. Therefore, this study is conducted by three research hypotheses: (i) the accruals are less persistent than the cash flows in the explanation of future earnings; (ii) the market does not correctly recognize the information contained in the accruals; and (iii) extraordinary gains can be obtained when using the magnitude of the accrual levels as an investment strategy. The sample included all nonfinancial companies traded on the Sao Paulo Stock Exchange (BMF&BOVESPA) between January 1 st 1995 and December 31 st 2011. The results indicated that the estimated coefficient of the accrual persistence was lower than the cash flow coefficient, thus sustaining the first research hypothesis. In the second part of the research, it was verified that the market correctly prices the accrual component of earnings, as a positive and statistically significant relation exists between accruals and future stock returns, which was not expected. Finally, the results found in the third hypothesis sustain the non-existence of the accrual anomaly in the Brazilian market, as the hedge portfolios were positive in only five out of 15 years under analysis. The results obtained in this study can encourage the establishment of policies to reduce the information asymmetry, making the improper transfer of wealth to companies with a low earnings quality impossible.