Influence Of Accruals,Operation Cash Flows Of Profitability On Stock Returns

When investors evaluate the operating performance of listed companies,they will first pay attention to the company's profitability,which is measured the accounting earnings indicators in the income statement,such as total profit,operating profit,and net profit.From the perspective of accounting,accounting earnings consist of two parts: accruals and cash-based profitability.Accruals are the non-cash component of earnings.They represent adjustments made to cash-based operating profitability to generate a profit measure largely unaffected by the timing of receipts and payments of cash.However,The operation cash flow indicates the increase and decrease of cash in the company's business activity,i.e.the inflow and outflow of cash.Since accruals are generally manipulated by accounting personnel's,operation cash flow can more accurately reflect the quality of corporate earnings.A large number of accruals may relatively represent a low quality of earnings,while the higher cash-based operation profitability possibly means a better quality of earnings.A precise understanding of the effect of accruals and cash-based operation profitability upon stock expected returns benefits the investors in correctly choosing better investment target,which also helps administrators to adjust their asset structure in a more appropriate way to achieve company benefits maximum.The subject of this paper is the Chinese A-share market.Based on annual accounting data and monthly stock returns from July,2006 to July,2018,the paper studies the existence of “accrual anomaly” by Sloan's(1996)accruals calculation,and the effect of accrual,cash-based operation profitability to compare their predictive ability by empirical study.The thesis constructs portfolios by grouping method and compares the value-weighted average excess returns of low-accrual portfolio and high-accrual portfolio to confirm the existence of “accrual anomaly”.That is,whether investors can get excess return by buying low-accrual portfolio and selling high-accrual.Next the paper constructs factors that capture the relation between average returns and profitability,accruals,and cash-based operation profitability.Finally this paper takes accruals and cash-based operation profitability as explanatory variables and uses Fama-MacBeth cross-section regression to study the effect of accruals and cash-based operation profitability on the stock expected returns,then compare the difference between the effect of accruals and cash-based operation profitability.The conclusions above infer that there exists “accrual anomaly” in Chinese stock markets.And the “accrual anomaly” actually strengthens when evaluated with asset pricing models that include profitability measures.It shows that cash-based operation profitability outperforms profitability that include accruals.Further,cash-based operation profitability subsumes accruals in predicting the cross section of average returns.