Accrual and cash flow anomalies in diversified firms: Impact of segment portfolio management

Our basic aim in this paper is to find out whether the returns of accrual and cash flow anomalies, in diversified firms, are sensitive to segment portfolio management. We further examine the persistence and the mispricing of abnormal accruals versus abnormal cash flows for diversified firms and whether SFAS N°131 reduced their market mispricing. Our results show that the persistence of abnormal accruals and abnormal cash flows decreases with the increase of the number of reported segments while the mispricing increases. SFAS N°131 reduced the market mispricing and did not entirely eliminate it. We also find that deciles of large abnormal accruals and large abnormal cash flows contain a higher frequency of firms having segments changes and that the magnitudes of the two components of earnings largely depend on changes in portfolio segments. Moreover, we find that the accrual and cash flow anomalies are largely related to segment portfolio management anomalies.