Understanding Accrual Anomaly: Evidence from Pakistan Equity Market
Keywords:Accrual, Anomalies, asset pricing, Pakistan stock exchange, portfolio
Several recent research papers provide evidence that there exists an accrual anomaly in the stock exchanges all over the world. For this study, the trends along the Pakistan Stock Exchange (PSX) have been reviewed, investigated, and narrated. This study investigates several portfolios of investments in the Pakistan Stock Exchange, to analyze the concept of accruals anomaly. Furthermore, this study explains in detail the relationship between the present investments and the future cash flows and briefs investors about the marketing conditions and the reasons for massive fluctuations in the stock prices due to accruals and future cash flows. The main objective of the study is to examine the fact that the future earnings and stock returns of the investors depend upon the level of accruals of the firms in which they are investing. In normal circumstances, higher investments will yield higher returns but in practical scenarios, the nature of investments in the firms is dependent upon the nature of accruals in that firm. If an investor invests in the stocks of the firm that has a higher market value but it also has a high level of accruals, then the expected return on these stocks will be lesser (negative). Moreover, the market risk of these investments will be greater. On the contrary, the investment in firms that have a low level of accruals yields a high return on their stocks. And these firms relatively have a lower risk of the investment. The core purpose of this study is to investigate the effects of the accruals on returns, by taking in the real data gathered from the PSX. In addition to the descriptive analysis of these facts, this research also lays stress on different strategies that can be undertaken by the investors to hedge the risk of these anomalies. The study concluded that the firms with lower accrued asset base provide better stock returns as compared to firms with higher accrued asset growth. The study found a presence of accrued asset growth anomaly in the Pakistan Stock Exchange.