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An investigation of certain accounting-related stock market anomalies Kim, Soh Yung


In financial markets, anomalies refer to empirical regularities in which security returns deviate from what would be expected in an informationally efficient market. This dissertation investigates explanations for stock market anomalies related to accounting information as documented by Dichev (1998) and Piotroski (2000). Using Ohlson’s (1980) measure of bankruptcy risk (O-Score), Dichev (1998) documents a bankruptcy risk anomaly in which firms with high bankruptcy risk earn lower than average returns. My study first demonstrates that the negative association between bankruptcy risk and returns does not generalize to alternative measures of bankruptcy risk. Then, by examining the nine individual components of O-Score, I find that funds from operations (FFO) is the only component that is associated with returns. Furthermore, I show that the return-predictive power of FFO is due to cash flows from operations. Taken as a whole, this study provides evidence that Dichev’s bankruptcy risk anomaly is a manifestation of investors’ under (over)-pricing of cash flows (accrual) component of earnings, i.e., the accrual anomaly documented by Sloan (1996). The second study investigates the effects of two potentially problematic research design choices which are often made in accounting-based studies of anomalies. I explore these issues by re-examining the results in Piotroski (2000), who finds that a simple, financial statement-based heuristic, when applied to a subset of firms with high book-to-market ratios, can discriminate between the firms that will eventually provide high returns and those that will be poor performers. I find that the relationship between Piotroski’s fundamental signals and subsequent returns is partly driven by the choice of return accumulation periods and the use of equally weighted re-turns. When the research design controls for both problems, the relationship disappears. Because the methods used in Piotroski are typical of those often employed in the accounting literature, this study suggests that evidence of profitable trading strategies and market inefficiency in the literature is likely to be overstated.

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