Journal of Financial Economics Vol. 121 No. 1 2016
Accruals, cash flows, and operating profitability in the cross section of stock returns
Abstract
Accruals are the non-cash component of earnings. They represent adjustments made to cash flows to generate a profit measure largely unaffected by the timing of receipts and payments of cash. Prior research uncovers two anomalies: expected returns increase in profitability and decrease in accruals. We show that cash-based operating profitability (a measure that excludes accruals) outperforms measures of profitability that include accruals. Further, cash-based operating profitability subsumes accruals in predicting the cross section of average returns. An investor can increase a strategy’s Sharpe ratio more by adding just a cash-based operating profitability factor to the investment opportunity set than by adding both an accruals factor and a profitability factor that includes accruals.
- DOI
- 10.1016/j.jfineco.2016.03.002
- Volume
- 121
- Issue
- 1
- Pages
- 28-45
- Language
- en
- Sources
- crossref bibtex:phds-export.bib openalex