Last modified: 2017-08-15
Abstract
This study aims to examine the persistence and mispricing of industry-wide cash flows, firm-specific cash flows, normal accruals, industry-wide abnormal accruals as well as firm-specific abnormal accruals. The separation of the individual components of these earnings in testing the persistence and mispricing becomes important so that the persistency of earnings components more broadly and comprehensively understood. In addition to that, the behavior of investors perception on the persistence of the earnings components was also studied.
Samples were taken from non-financial companies listed on the Indonesia Stock Exchange from 2013 to 2015. The analysis method used for persistence was the ordinary least square regression. The Wald test and Mishkin test were used to test the investors’ ability to distinguish high and low persistence and rational pricing using.
The results of this study demonstrate that the industry-wide cash flows are the most persistent compared to other earnings components. The least persistent ones are firm-specific abnormal accruals. Moreover, it turns out the investor able to capture the differences of persistence and tend to overprice (underprice) to the persistence of industry-wide cash flows (firm-specific abnormal accrual). In addition, this study shows that investors underprice (overprice) to the persistence of firm-specific cash flows (normal accruals and industry-wide abnormal accruals). Several research implications for investors are as follows: the quality of earnings that is persistence in pricing and the separation of normal and abnormal accruals into industry-wide and firm-specific, as well as separating the cash flows into industry-wide and firm-specific because these earnings components have different persistence and different priced by investor.
Type of Paper: Empirical
Keywords: persistence, mispricing, industry-wide abnormal accruals, firm-specific abnormal accruals, industry- wide cash flows, firm-specific cash flows.