The persistence and pricing of earnings, accruals and free cash flows : Australian evidence

Kristen Anderson, Kerrie Woodhouse, Alan Ramsay, Robert Faff

    Research output: Contribution to journalArticlepeer-review

    Abstract

    We test the persistence (H1) and pricing (H2) results found by Sloan (1996) in the Australian market. Our results generally support H1, showing that earnings are persistent, however the persistence of losses appears just as high as that of profits. When earnings are decomposed into future cash flows (FCF) and accruals, the persistence of FCF is generally greater than that of accruals. For H2, earnings are significantly underpriced, a result that contrasts with Sloan (correctly priced) and Dechow et al. (2006) (overpriced). The extent of mispricing appears lower for profits and greater for losses. When earnings are decomposed into FCF and accruals, results show significant mispricing for all samples – Australian investors significantly underestimate the persistence of FCF. This is especially so for firms with negative earnings and negative FCF. In contrast to Sloan (1996), our results indicate that the Australian market never overestimates the persistence of accruals.
    Original languageEnglish
    Pages (from-to)6-24
    Number of pages19
    JournalJournal of Accounting and Management Information Systems
    Volume25
    Publication statusPublished - 2008

    Keywords

    • cash flow
    • pricing
    • earnings management
    • Australia

    Fingerprint

    Dive into the research topics of 'The persistence and pricing of earnings, accruals and free cash flows : Australian evidence'. Together they form a unique fingerprint.

    Cite this