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The profitability and consistency of the accounting abnormal accruals anomaly in UK firms

Ahmad, ALA 2009, The profitability and consistency of the accounting abnormal accruals anomaly in UK firms , PhD thesis, University of Salford.

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    Abstract

    This research explores new evidence on the profitability, consistency and potential explanations of the accruals anomaly. We extend prior research into the association between earnings and share price by discrirninating between firms on the basis of the abnormal accruals contained in the reported operating profits. We investigate the accounting abnormal accruals enigma using U.K company data for the period 1968- 2005 to see whether companies reporting incomes consisting of the highest [lowest] operating abnormal accruals as a proportion of total assets significantly earn lower [higher] returns than the generality of the companies. We define a firm's abnormal accrual as the difference between its actual and normal total accruals. Total accruals are calculated as the change in non-cash working capital before income taxes payable less total depreciation expense. The themes of this thesis are two-fold. First, the time-series version of the Modified Jones Model is employed to decompose total operating accruals as they appear on the sample companies' financial statements into normal and abnormal accruals. Second, an empirical examination of the profitability and consistency of the abnormal accruals anomaly is undertaken. Abnormal returns for abnormal accruals deciles are estimated using a range of tests: the market-, the size-, the book-to-market- and the size-and-book-to-market-adjusting tests. Our abnormal returns estimates for the abnormal accruals deciles show evidence that the abnormal accruals anomaly in the UK is driven particularly by the highest abnormal accruals firms with significant negative abnormal returns over three years of about 4-5% per annum. Potential risk explanations for the observed accruals anomaly based on variety of tests including the use of the Fama and French three factor model are provided. The findings indicate that the abnormal accruals anomaly is robust after controlling for the risk factors. Therefore, the implication of this study is to short sell those shares in the highest abnormal accruals decile or, alternatively, to avoid buying them.

    Item Type: Thesis (PhD)
    Contributors: Arnold, GC(Supervisor)
    Themes: Built and Human Environment
    Schools: Colleges and Schools > College of Business & Law > Salford Business School > Management Science and Statistics
    Colleges and Schools > College of Business & Law > Salford Business School
    Colleges and Schools > College of Arts & Social Sciences
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    Depositing User: Institutional Repository
    Date Deposited: 21 Jul 2011 10:56
    Last Modified: 19 Feb 2014 10:33
    URI: http://usir.salford.ac.uk/id/eprint/14920

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