Does Anomaly Exist in the Accrual Component of Earnings? Evidence from Pakistan

Abstract

This study is carried out with an objective to investigate which component of earnings i.e. accruals or cash flows attributed more to explain future earnings of the companies in Pakistani perspective. Data were collected from 143 non-financial companies listed at Pakistan Stock Exchange for a period from year 2012 to year 2018. Through cross sectional regression and event time plots on the future earnings, this study has found that the both components i.e. accruals and cash flows are positively significant with the future earnings. However, accruals as an anomaly in the context of Efficient Market Hypothesis are more persistent in explaining future earnings. This study gives an evidence that accrual anomaly exists in the financial statements of Pakistani non-financial companies listed at Pakistan Stock Exchange.