The Role of Accruals Anomaly on Stock Market Return of Non-Financial Firms Listed on the Nairobi Securities Exchange

Abstract

The accrual anomaly arises due to the market mispricing of the total accruals and their components and the investors fail to incorporate the differential persistence of the cash flow components and accruals of firm earnings. This study sought to determine the effect of accruals anomaly on stock market return of non-financial firms listed on the Nairobi Securities Exchange. The study adopted positivism as data collection and hypothesis development and testing was achieved. The study used quantitative research design to correlate study variables using mathematical analysis methods. Correlation results indicate that accrual anomaly was negatively and significantly associated to stock market return of non-financial firms. Regression results for the static model indicate that accrual anomaly and stock market return of non-financial firms is negatively and significantly related. The results for the dynamic model indicate that accrual anomaly and stock market return is negatively and significantly related. The study concluded that accruals anomaly has a negative and significant effect on stock market return in non-financial firms on the Nairobi Securities Exchange. The analysis concluded that the accrual anomaly has implications because firms with high reported accruals exhibit lower stock market returns. High valuations of the investors are related to accruals because of the accounting distortions. The study recommends that having knowledge regarding accrual toward stock return in the future will help the investors to minimize the earning prediction error so that investors can make appropriate decision making. The study recommends for the investors to implement the investment strategy, which to short (sell) low accrual stocks and long (buy) high accrual stocks in Nairobi Securities Exchange with prediction that the stock gains higher return in the future based on the prevailing investor projections. Keywords: Accruals Anomaly, Stock Market Return & Non-Financial Firms Listed