An Analysis of Accrual Anomaly in Case of Karachi Stock Exchange

This study investigates the existence of accrual anomaly by using a sample of 340 non-financial firms listed at Karachi Stock Exchange. The objective of the study is to examine the persistence of the accruals and cash flow components and their respective effect on future stock prices and a hedge portfolio returns. The results indicate that the continuity and durability in earnings turns out to be dependent on the accrual and cash flow components of earnings’ magnitudes. Therefore, the efficient market hypothesis which states that all publicly available information is reflected in stock prices fails to hold. In addition, the failure of stock prices to comprehend the different properties of the constituents of earnings looks like investors inability to differentiate between the two components. The non-existence of market efficiency does not qualify that investors are irrational or the opportunities of earning profits are not exploited. But normal returns can be earned by opting for an active investment strategy which fully utilises the analysis of financial statements. The study concludes that accrual anomaly exists in Karachi Stock Exchange.