Investors have long sought to identify reliable predictors of stock returns to maximize their investment performance. One area of interest has been the role of accounting measures such as accruals, cash flows, and operating profitability in predicting cross-sectional stock returns. Prior research has uncovered two anomalies in this area: expected returns increase in profitability but decrease in accruals. In this research review, we will examine “Accruals, Cash Flows, and Operating Profitability in the Cross Section of Stock Returns” by Ball, R., Gerakos, J., Linnainmaa, J. T., & Nikolaev, V. V. (2015), which provides new insights into the effectiveness of cash-based operating profitability as a predictor of stock returns.
Vince (Qijun) Chen, Director of Research, Connect with Vince on LinkedIn
