Value-Glamour and Accruals Mispricing: One Anomaly or Two?
We investigate Beaver's (2002) conjecture that the accruals anomaly is a manifestation of the glamour stock phenomenon documented in the finance literature. Value (glamour) stocks, characterized by low (high) past sales growth, high (low) B/M, high (low) E/P and high (low) C/P, are known to earn positive (negative) future abnormal returns. Note that "C" or cash flow is operationalized in the finance literature as earnings adjusted for depreciation. Sloan (1996) shows that firms with low (high) total accruals earn positive (negative) future abnormal returns. We find that a new variable, operating cash flows measured as earnings adjusted for depreciation and working capital accruals, scaled by price (CFO/P) captures mispricing attributed to the four traditional value-glamour proxies and accruals. Interpretation of this finding with respect to Beaver's conjecture depends on the reader's priors. If the reader believes that value-glamour can be operationalized only as C/P, and not CFO/P, then one would conclude that (i) Beaver's conjecture is invalid; and (ii) CFO/P is a parsimonious variable that captures the mispricing attributes of two distinct anomalies, value-glamour and accruals. However, if a reader views the value-glamour anomaly broadly as a fundamentals-to-price anomaly, then (i) CFO/P variable can be considered an expanded value-glamour proxy and; (ii) our results are consistent with Beaver's conjecture that the accruals anomaly is the glamour stock phenomenon in disguise.
SMU Cox: Accounting (Topic)