Accrual anomaly in emerging markets

Abstract

This paper investigates the presence and the drivers of the accrual anomaly in emerging markets during 2000-2016. Our empirical results show that cash flows are more attributable to earnings persistence than accruals, while both of these earnings components are mispriced in certain emerging markets. We find the evidence of accrual anomaly in nine emerging markets including Brazil, China, India, Indonesia, Malaysia, Peru, South Korea, Taiwan, Thailand, and a pooled sample of Arabian markets (Qatar, Saudi Arabia, and the United Arab Emirates), while abnormally high hedge returns of an accrual-based trading strategy are found in China and South Korea stock markets. Further analysis indicates that the mispricing of accruals and cash flows in emerging markets are the mutual product of investor naivety and managerial incentives. The mechanism tests suggest that insider trading incentives and contracting incentives are the potential motives of the aggressive use of accrual accounting. We conclude that corporate managers deliberately contribute to information asymmetry that drives the misvaluation. Our paper provides new insights into market inefficiency in emerging markets across the globe.