The Information Content of Current Accruals of Chinese A Listed Firms
|School||Southwestern University of Finance and Economics|
|Keywords||current accruals information content accounts receivable accounts payable inventory profitability predictability value relevance|
Accrual-basis plays a fundamental role in the framework of modern accounting. Based on accrual accounting, accounting earnings consists of non-cash accruals and operating cash flow. Not only should we focus on the information content of accounting earnings, aggregate accruals and cash flows, but also we should pay more attention to the generating process of accounting figures than figures themselves. In other words, it is essential to conduct an in-depth analysis and each element of aggregate accruals. This dissertation is trying to solve the following problems: firstly, the variations (increase or decrease) in current accruals such as accounts receivable and accounts payable as well as inventory possess any predicting values of enterprises’future profitability? Does any correlation exist with the fluctuations of stock price? Is it helpful to investors to predict the stock’s abnormal return? Do investors differentiate the information content of companies with different liquidity? From practical perspective, according to the cash/accounts payable-inventory-accounts receivable-cash operating model in most enterprises, we focus on the operating activities and final operating performance by investigating the information content of current accruals. In a sense, the analysis and conclusions of our research is valuable for enterprises to improve efficiency and effectiveness of operations.The dissertation employs both theoretical and empirical analysis methodology and consists of five chapters. The introduction chapter introduces the purpose, research framework and innovations and contributions. Chapter two lays the theoretical analysis, by comparing the characteristics of accrual basis and cash basis, by discussing the financial influence exerted by accounts receivable, inventory and accounts payable, and by explaining the negative outcome of information asymmetry and the relationship of accounting information and Effective Market Hypothesis.Based on literature review and display of hypothesis, chapter three focus on the empirical analysis of current accruals’predictability of profitability and development capability. We adopt three indicators (ROS, ROA and ROE) to measure profitability and the indicator of sales to measure development capability. On the other hand, given that the performance of operating activities is closely related to liquidity. Therefore, the data has been regressed according to good/bad liquidity and draw some unusual conclusions.Chapter four continues to investigate the information content of current accruals with respect to value relevance. We adopt M/B ratio and abnormal return as two dependent variables in two models. The first model is to measure the market reaction to the variations of current accruals, and the second one is to measure the current accruals’predictability of abnormal return. Similarly, we consider the impact of different liquidity and conduct the regression based on two groups according to different liquidity. The main conclusions have been drawn as follows.(1) the market considers the increase in sales of prior year as a good news and react positively; the increase in sales is more preferable to companies with poor liquidity and investors are expected to gain higher abnormal return.(2) Investors react positively to the increase in accounts receivable. However, the increase in AR is negatively associated with future abnormal return at a significant level. This evidence demonstrates that the accounting earnings contributed largely by the increase in AR are lack of sustainability, and investors are not able to attain expected return. Therefore, the intrinsic value of this kind of stocks has been overestimated.(3) As for firms with good liquidity, the increase in accounts payable(AP) is positively associated with market value. One possible interpretation is that companies able to make use of new business credit to relieve the pressure of cash and market considers this option acceptable.(4) In both cases of differing the liquidity or not, the increase in inventory is positively correlated with market value but insignificantly associated with future abnormal return. Although the increase in inventory is an important ingredient for accounting earnings but it is harmful to the sustainability of earnings. Investors, however, haven’t realizes this point. The decrease in inventory is good news to companies with bad liquidity. Nevertheless, market reacts negatively towards this fact and underestimates the stock value of these companies.The innovations and contributions of this dissertation are as follows. Firstly, the author makes an attempt of segregate the aggregate accruals into the variations of accounts receivable, accounts payable and inventory for the sake of examining their information content. (2) By concentrating the fundamental financial information, the author discusses the association of the variations of current accruals with companies’profitability and development capability.(3) As for research methodology, the author employs more powerful R software for data-mining, eliminating the negative impact of outliers and guarantee the plausibility of analysis.The continuous study can be expected as follows. As a confounding item, inventory consists of raw materials, products in-process and finished goods. The increases in raw materials and products in-process indicate booming sales and greater demand. On the other hand, the increase in finished products indicates the slack sales and stock in warehouses. The above two cases both lead to the increase in inventory and indicate contrast scenarios of sales. Therefore, the variations of raw materials and finished goods would mask the real information content of inventory. In a sense, we should segregate the inventory into sub items and therefore draw more valid conclusions. Secondly, it is more desirable to expand the time window to the period after 2006, since the reform on non- tradable shares is expected to exert more positive influence on stock market in China. The information content of current accruals is supposed to be more convincing and valuable, especially for institutional investors.