Keywords

disclosure quality, mispricing, accrual anomaly, cash flow mispricing

Abstract

In this paper, we investigate the role that disclosure quality plays in the accurate valuation of accruals and cash flow. We predict that stock prices of firms with higher-quality disclosures more accurately reflect the persistence of accruals and cash flow. We test our predictions using analyst ratings of disclosure published in the annual Association for Investment Management and Research (AIMR) Corporate Information Committee Reports for the years 1982 through 1996. The results provide strong evidence of mispricing for the subset of firms with lower-quality disclosures and of a significant reduction in mispricing for the subset of firms with higher-quality disclosures. We confirm the results of our Mishkin tests using returns regressions that also control for investor sophistication, analyst following, and firm life cycle stage. Overall, our results demonstrate the mitigating effect that higher-quality disclosure has on mispricing.

Original Publication Citation

Drake, Michael S. and Myers, James N. and Myers, Linda A., Disclosure Quality and the Mispricing of Accruals and Cash Flow. Journal of Accounting Auditing and Finance 24 (3), 2009. Available at SSRN: https://ssrn.com/abstract=985949 or http://dx.doi.org/10.2139/ssrn.985949

Document Type

Peer-Reviewed Article

Publication Date

2009

Publisher

Journal of Accounting Auditing and Finance

Language

English

College

Marriott School of Business

Department

Accountancy

University Standing at Time of Publication

Full Professor

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