In contrast to cash flow, the growth in long-term net operating assets and accruals display a lower degree of persistence in their capacity to gauge future earnings performance. This disparity can be attributed to their differential impact on the denominator of one-year-ahead ROA. Moreover, there is a tendency to overestimate the predictive value of accruals and long-term net operating asset growth, and this tendency can result in a mispricing of equity values. In light of these, the study concludes that the accrual anomaly (Sloan, 1996) is a subset of a broader anomaly related to the mispricing of growth in net operating assets.

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Shiqi Hu, Portfolio Research Analyst