Persistence in accounting profit and its components:: implications from the measurement of accruals

This paper is an extension of the evidence found by Francis and Smith (2005) for the US market. We run an earnings component persistence analysis based on two alternative measures of accruals for three countries: Spain, as our local market; Germany as a representative example of a continental accounting system; and the United Kingdom, as a country belonging to an Anglo-Saxon accounting system. Our evidence shows that the different persistence of cash flow and accruals becomes more visible in the Anglo-Saxon accounting systems. In those countries, zero cost strategies based on accruals generate positive abnormal returns. Moreover, the Mishkin test (1983) shows an incorrect valuation of accruals in the UK (overvaluation) and in Germany (undervaluation). When we use the accrual specific measure developed by Francis and Smith (2005), differences of persistence are reduced and the abnormal returns disappear. However, the incorrect valuation showed by the Mishkin test (1983) is not corrected by this specific measure of accruals.