ATJ Asian Tax Journal

Asian Tax Journal

Print ISSN 1738-3323 Online ISSN 2733-9270

The Pricing of Earnings Information Component in the KOSDAQ Market

  • Ryu, Sung-Yong

Asian Tax Journal Vol. 7 No. 3 (2006), pp. 9-28

Abstract

Prior research reveals that the accrual component of profitability is less persistent than the cash flow component, and that investors fail to fully appreciate their differing implications for future profitability(Sloan 1996). This paper examines the market pricing of Jones(1991) model-estimated discretionary accruals and non-discretionary accruals to test whether stock prices rationally reflect the one-year ahead earnings implications of these accruals. Using the Mishkin(1983) and hedge-portfolio test methods Sloan(1996) and Xie(2001) employ, we find that the market underestimates the persistence, or one-year ahead earnings implications, of the operating cash flows, and consequently underprices the operating cash flows. and we also find that the market rationally estimates the persistence, or one-year ahead earnings implications, of the discretionary and non-discretionary accruals, and consequently properly prices these accruals. These results extend Subramanyam(1996) by demonstrating that the market not only prices, but also underprices the operating cash flows. They also suggest that the market can rationally price the discretionary accruals and the non-discretionary accruals.

Keywords

  • discretionary accruals
  • rational expectation hypothesis
  • operating cash flows

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Asian Tax Journal

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