Accrual Anomaly in the Philippine Market

Abstract

This paper aims to study the presence of Accrual Anomaly in the Philippine stock market. The two components of earnings, cash flow from operation and accrual, have different characteristics and properties which results to different persistency between the two. But, in some cases, investors do not take into consideration the difference in persistence of both component which results to the presence of accrual anomaly in certain markets. This occurs because investors fixate in the earnings rather than going deeply in the difference of its components. Stocks that are listed in Philippine Stock Exchange from year 2008 to 2019 are analyzed whether investors can identify the difference between the two or they just fixate on the earnings of the firms. This study aims to answer these two hypotheses 1) Accrual anomaly is present in the Philippine stock market and 2) The reason for this presence is due to accounting distortions. The regression analysis of the Modified Jones Model proves that accruals are less persistent than the cash flow from operation. Additionally, when accruals are divided into two components which is Non-discretionary Accrual and Discretionary Accrual, the regression analysis shows that Discretionary accruals are less persistent when compared to Non-discretionary accruals. Using the Mishkin Test (1983), the result shows that investors do overprice the accrual anomaly. But, Philippine investors also do recognize the persistence of both components of earnings, accrual and cash flow from operation. They understand that the cash flow have higher quality when compared to the accruals. Investors are aware of the difference of the two components but overprice both CFO and accruals. Richardson Model also shows that the presence of accrual anomaly is because of accounting distortion of some discretionary accruals. This is due to the presence of estimations, distortions, and misstatements that is ingrained in the discretionary accruals. Furthermore, when the sample is divided into Profit Firms and Loss Firms, the Mishkin test shows that there is no accrual anomaly in Profit firms but in case of Loss Firms, accrual anomaly is indeed present.