Journal of Accounting and Investment Vol. 21 No. 2, May 2020
Article Type: Research Paper
The Existence of Accrual Anomaly
Phenomena in Indonesia Capital Market
Gerrinko Giffari Wurintara
1
* and Hamidah
2
Abstract:
Research aims: Sloan (1996) finds that investors mispriced the stock. They could
not detect differences in earnings persistence. Such a phenomenon is called an
accrual anomaly. This study aims to find out the existence of accrual anomalies in
the Indonesian capital market.
Design/Methodology/Approach: The accrual anomaly phenomenon is supported
by testing whether there is a negative effect between accrual and abnormal
returns. The research sample consisted of manufacturing companies from 2014 -
2017, which were tested using the Ordinary Least Square.
Research findings: First, the results show that the company’s accrual rate
negatively influenced the abnormal returns, both before and after the use of
control variables. Second, this article also discovered that companies having low
accrual rates were consistent over four years and had greater returns compared
to companies with high accrual rates.
Theoretical contribution/ Originality: This article contributes to financial literacy
and accounting, especially to the theory of efficient market hypotheses. There
was evidence of accrual anomalies indicating that the Indonesian capital market
was inefficient.
Practitioner/Policy implication: Indeed, the results of this study contribute to
investors and financial analysis to consider and reevaluate their long-term
investment strategies in purpose to avoid mispricing in the earnings component.
Research limitation/Implication: This research is inseparable from limitations,
one of which is the presence of shares that were not actively traded in the study
sample. Second, this article only used a sample of companies that did not
experience a loss.
Keywords: Anomaly Accrual; Abnormal Return; Accrual
Introduction
Accounting and financial literature shows that the magnitude of the
accrual component (cash flow) in earnings is negatively correlated with
future stock returns (Koerniadi & Tourani-Rad, 2007). This anomalous
phenomenon occurs because the investors only considered current
earnings in decision making, which then resulting in stock price
misprincing (Toha & Harahap, 2014).
However, the market is unaware that there are differences in persistence
between the accrual component and the cash flow from reported net
income (Koerniadi & Tourani-Rad, 2007; Sloan, 1996; Toha & Harahap,
2014).
AFFILIATION:
Department of Accounting, Faculty
of Economy, University of
Airlangga, Surabaya, Indonesia.
*CORRESPONDENCE:
gifarigerinko@gmail.com
THIS ARTICLE IS AVAILABLE IN:
http://journal.umy.ac.id/index.php/ai
DOI: 10.18196/jai.2102152
CITATION:
Wurintara, G. G. & Hamidah.
(2020). The Existence of Accrual
Anomaly Phenomena in Indonesia
Capital Market. Journal of
Accounting and Investment, 21(2),
334-345.
ARTICLE HISTORY
Received:
27 April 2020
Reviewed:
4 May 2020
Revised:
8 May 2020
Accepted:
12 May 2020
mailto:gifarigerinko@gmail.com
http://journal.umy.ac.id/index.php/
https://journal.umy.ac.id/index.php/ai/article/view/8695
https://journal.umy.ac.id/index.php/ai
Wurintara & Hamidah
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Journal of Accounting and Investment, 2020 | 335
The cash flow component has a more substantial persistence than the accrual
component (Barth & Hutton, 2004; Bradshaw, Richardson, & Sloan, 2001; Sloan, 1996).
Sloan (1996) argues that the accrual recording process is fragile to earnings
management fraud because recording and decision making can be based on
management’s view. Thus, management can manage income broadly, based on their
needs. The accruals method provides respite in the claiming timing of both revenues and
expenses. This accrual method causes the accrual earnings component to have weak
persistence compared to the cash component because it does not reflect the company’s
full capacity (Collins & Hribar, 2000; Kim, Kim, Kwon, & Lee, 2015; Koerniadi & Tourani-
Rad, 2007; Park, Han, Lee, & Kim, 2018; Sloan, 1996; Toha & Harahap, 2014).
When the current year’s earnings contain a high accrual component (cash flow), the
earnings persistence becomes low (high). The low (high) persistence produces lower
(higher) profit in the future if it is compared with the investor’s expected profit.
Consequently, the investor negatively (positively) reacts to company stocks (Toha &
Harahap, 2014). Therefore, the investor who ignores the difference in profit persistence
will cause the share highly accrual (overvalue) or lowly accrual (undervalue) (Koerniadi &
Tourani-Rad, 2007).
Sloan (1996) introduces the first accrual anomaly phenomenon. He discovers that shares
with low accrual (high) produce positive (negative) abnormal returns in the future. Then,
the application of the accrual strategy in the portfolio produces a yearly significant
abnormal return score of 10.4%. The abnormal return happens because the accruals and
cash flows are negatively correlated. Sloan (1996) argues that cash flow anomalies and
anomalies exist side by side. On the one hand, investors tend to give excessive
valuations (overprice) to companies having high accruals. On the other hand, they give
undervaluations (underprice) to companies having low accruals. It causes the stock price
to be corrected in the future (Toha & Harahap, 2014). Companies having high prices will
decrease because their performance cannot answer the expectations of market
participants, whereas companies with low prices will increase their stock prices as the
performance produced in the future exceeds the expectations of market participants.
Thus, due to the correction, an abnormal return occurs in consequence of the mispricing
of the stock price in the previous period (Toha & Harahap, 2014).
Various countries have studied the phenomenon of accrual anomalies. Some
researchers found that anomalies occurred in European countries, Australia, Germany,
and the United Kingdom (Ali & Gurun, 2009; Beer, Hamdi, & Zouaoui, 2018; Clinch,
Fuller, Govendir, & Wells, 2012; Kaserer & Klingler, 2008; Li, Niu, Zhang, & Largay III,
2011; Papanastasopoulos, 2017; Park et al., 2018). Several literary studies have found
accrual anomalies in Indonesia, Turkey, and China but with a not too large degree of
magnitude (Li et al., 2011; Ozkan & Kayali, 2015; Toha & Harahap, 2014). Other studies
found that accrual anomalies were not detected in some developing countries such as
India, Brazil, and New Zealand (Cupertino, Martinez, & Costa Jr, 2012; Koerniadi &
Tourani-Rad, 2007; Sehgal, Subramaniam, & Deisting, 2012). Pincus, Rajgopal, and
Venkatachalam (2007) argue that differences of the legal system between countries
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adhering to common law and those adhering to code law cause of different results of
accrual anomalies in various countries.
The accrual anomaly phenomenon is an essential study because it can provide benefits
for investors to evaluate their investment strategies and decisions to be more accurate.
However, literacy studies about accrual anomalies in Indonesia are still limited. One of
them is conducted by Toha and Harahap (2014). They found accruals anomaly in
Indonesia, but the anomaly was different from that existing in America that was
consistent for 30 years. This study is different from that conducted by Toha and Harahap
(2014) as it explores the existence of accrual anomalies in the period after applying the
IFRS in Indonesia. The IFRS application can improve the quality of financial statement
information and reduce asymmetry information (Edvandini, Subroto, & Saraswati, 2014).
The difference quality of financial statement information after the application of IFRS
may have an impact on the earnings component quality, which is closely related to the
accrual anomalies phenomenon. Therefore, the phenomenon of accrual anomalies after
the application of IFRS is crucial to study.
Second, this article used the Ordinary Least Square (OLS) regression to test the
mispricing of the accrual component. The usage of this method was based on findings
from Kraft, Leone, and Wasley (2007). The majority of accrual anomaly research utilized
the Miskins Test (MT) to explore the phenomenon of accrual anomalies. However, Kraft
et al. (2007) show that the use of MT ignores several explanatory variables that might
affect the determination of accrual mispricing. Therefore, the phenomenon of accrual
anomalies is often lost when the researcher conducts accrual anomaly testing by
involving explanatory variables. Kraft et al. (2007) argue that OLS is equivalent to MT
when testing the market pricing accounting figures. Hence, Kraft et al. (2007) suggest
considering the use of OLS if it is compared to MT because OLS offers some advantages
in accounting research settings. This study involved accruals, CFO, and some control
variables in determining the existence of accrual mispricing. Therefore, the use of OLS
was considered more appropriate than the Mishkin Test.
Based on these two motivations, this study aims to explore the existence of the accrual
anomaly phenomenon in the Indonesian capital market. Its existence indicates whether
the investors in Indonesia make mistakes or not in interpreting the company’s earnings
information. Practically, this study provides benefits to investors in evaluating their
investment strategies based on the research findings. Theoretically, this article
contributes to the extends the efficient market hypothesis theory discussion in the
Indonesia study context. The current study provides evidence that accrual anomalies
occurred to indicate the inefficient Indonesian capital market.
Literature Review and Hypotheses Development
The efficient market hypothesis states that an efficient market is a condition when the
market price of a security can reflect accessed or available information (Fama, 1970).
Fama (1970) classifies efficient markets into three types, namely wear, semi-strong, and
Wurintara & Hamidah
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strong forms. First, the market is said to be efficient in a weak form if the price of
securities contained in the market can reflect past information that has been published.
Second, the market is said to be efficient in the form of half strong if the price of a
company’s securities can reflect all past information plus new information that is
published. Third, the market is stated to be efficient in a strong form if the price of a
company’s securities can reflect all information, including private information about the
company. This research utilized past information regarding the company’s past accrual
level to determine whether or not it would correct the stock price in the future.
Therefore, this research examined a weak-form efficient market in Indonesia.
Previous literature considers that the cash flow component has a stronger persistence
than accrual earnings because it tends to be free from the element of earnings
management (Collins & Hribar, 2000; Koerniadi & Tourani-Rad, 2007; Sloan, 1996). Some
previous studies found that anomalies occurred in European countries, Australia,
Germany, and England (Ali & Gurun, 2009; Beer et al., 2018; Clinch et al., 2012; Kaserer
& Klingler, 2008; Li et al., 2011; Papanastasopoulos, 2017; Park et al., 2018). Several
studies have discovered accrual anomalies in Indonesia, Turkey, and China but with a
not too large degree of magnitude (Li et al., 2011; Ozkan & Kayali, 2015; Toha &
Harahap, 2014). Ozkan and Kayali (2015) and Li et al. (2011) uncovered that accrual
anomalies were detected clearly when loss companies were excluded from the study.
This article tries to provide an examination of the phenomenon of accrual anomalies in
Indonesia’s Capital Market by excluding companies suffering losses. Thus, it is suspected
that accrual anomalies will be detected more clearly.
Sloan (1996) argues that investors are fixated on reported earnings without selecting the
different persistence is from the earnings component. Sloan (1996) is known as the
Earnings Fixation Hypothesis. Sloan (1996) further argues that the accrual recording
process is fragile to earnings management fraud because recording and decision making
can be based on management’s view. Thus, management can manage income broadly,
based on their needs. The accruals method provides respite in the claiming timing of
both revenues and expenses. This accrual method causes the accrual earnings
component to have weak persistence compared to the cash component because it does
not reflect the company’s full capacity (Collins & Hribar, 2000; Kim et al., 2015; Koerniadi
& Tourani-Rad, 2007; Park et al., 2018; Sloan, 1996; Toha & Harahap, 2014).
Sloan (1996) shows that the persistence of the accrual component is lower than the cash
component. However, investors fail to realize this component. The investors only focus
on overall profits and ignore the potential impact contained in this persistence
difference. Companies with high accruals and low cash flow will have low earnings
persistence. The results of the research show that low (high) stock shares produce
positive abnormal returns (negative), and trading strategies based on the company’s
accruals produce a significant annual abnormal return of 10.4%. This result indicates
that accruals and cash flows are negatively correlated (Sloan, 1996). Sloan (1996) also
found that the accrual component was negatively correlated (positively) with future
stock returns and statistically significant. It indicates that the accrual component is a
crucial thing causing stock valuation errors by investors (forecast error), too high
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optimism for future earnings (companies with high accruals) is a form of weighting or
wrong valuation. The negative effect between accounting accruals and abnormal returns
occurred because the investors ignored the differences in the persistence of the
earnings component.
Conversely, companies having high cash flow and low accruals will have high earnings
persistence. High (low) earnings persistence will determine the success (failure) of the
company facing investors’ expectations. Investors will react positively (negatively) to
success (failure) through the price of a company’s securities in the capital market. The
efficient market hypothesis (EMH) assumes investors as elements always acting
rationally in responding to the information. The responding information rationally
causes the price of a security to reach a new equilibrium point when the market receives
new news. However, the investor failure in anticipating the differences persistence of
earnings components and focus on earnings cause them to react improperly. They tend
to overvalue the high-priced companies and undervalue the low-priced companies,
causing anomalies and mispricing of stock prices. Thus, the hypothesis in this article is
proposed as follows.
H1: The accrual earnings component has a negative effect on abnormal returns.
Research Method
This research was conducted on manufacturing companies listed on the Indonesian
Stock Exchange during 2014 to 2017 (four research periods). Manufacturing companies
are considered to have complexity compared to service or trading companies. Thus,
flexibility in accrual recognition is more complex, making it appropriate to be used as a
research object about accrual anomalies. The sampling criteria are as follows. First, the
sample companies must be consecutively listed on the Stock Exchange from 2014-2017.
It was used for the calculation needs of operational variables. Second, to avoid the
effects of too extreme returns due to price changes due to adjustments from corporate
actions, the companies carrying out stock split and reverse stock during the study period
were excluded from the sample. Third, based on the results of the study Ozkan and
Kayali (2015) and Li et al. (2011), new accrual anomalies can be detected when loss
companies are excluded from the study sample. Table 1 Sohws the research sample
calculation.
Table 1 Research Sample
Data Sample Total
Manufacturing companies were successively listed on the
Indonesia Stock Exchange 2014-2017
532
Manufacturing companies conducting stock split/reverse
during the study period
(108)
Companies experiencing loss in the 2014-2017 period (106)
The total sample of companies during the study period 318
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The dependent variable in this study was the abnormal return (Y). Abnormal return is
the advantage of returns occurring against normal returns (Jogiyanto, 2015). The
abnormal return in this study was measured using Buy and Hold Abnormal Return
(BHAR). Therefore, BHAR was be calculated using the following formula (Barber & Lyon,
1997).
(1)
Note:
BHAR : Buy and Hold Abnormal Return
Rit : The actual return occurring on the shares “i” period in t- month.
Rmt : Market returns occurring in the t-period.
ΣT : Number of T-periods.
While, the market returns are returns on portfolio groups formed based on their
respective sizes (Koerniadi & Tourani-Rad, 2007; Toha & Harahap, 2014).
The independent variable in this study was the accruals component of earnings (X). The
accrual earnings component is the profit generated from accounting policies to
recognize an economic transaction as profit (both income and expenses) without cash
flow (Toha & Harahap, 2014). The cash component of income is the difference between
net income and the accrual income component (Sloan, 1996). The accrual component in
this article was alternated using traditional accruals, with the following measurements.
(2)
The authors considered many factors that might affect the value of the company. Then,
in the existence of an accrual anomaly testing, several control variables were used,
namely Size, Book to Market Ratio, and Cash From Operation (CFO). The selection of
control variables was based on a prior study regarding anomaly accruals. It is intended
that the effect of the independent variable on the dependent variable is not biased
projected, as measured by Size (Sloan, 1996), BM and CFO (Koerniadi & Tourani-Rad,
2007) by the following formula.
(3)
(4)
(5)
Data analysis can be assisted by statistical software, namely SPSS 22. There were two
stages of data analysis used in this study, namely (1) descriptive statistical testing, (2)
regression analysis testing. Then, the research hypothesis determined whether investors
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in the Indonesian capital market mispriced the accruals earnings component. The
multiple OLS regression testing (with control variables) was carried out to test the
hypothesis with the following model. Based on the two hypotheses, the research model
was arranged as follows.
(6)
Hypothesis testing was done by using the equation model (8). The null hypothesis
criteria (Ho) and the alternative hypothesis (Ha) declared Ho is accepted if β_1 ≥ 0,
while the alternative hypothesis is accepted if Ha: β_1< 0.
Result and Discussion
Descriptive statistical analysis showed that the variable Y (Abnormal Return) had a mean
of -,017 (refer to Table 2). From the mean score of this variable, the company used in
the study produced a negative abnormal return. By considering the average distribution
of the score of the accrual variable, it can be concluded that the study sample was
dominated by companies with negative accruals or low accruals. The size control
variable showed the sample showing an equal distribution as the mean of this variable
was also around the middle. The BM variable had a mediocre mean score company, and
the means showed that the sample of the research had a book score of 1,628 times
greater than its market value. The CFO control variable showed that the average
company used as a sample had a total CFO of 7.5% of the total net income.
Table 2 Descriptive Statistical Analysis
Variable N Minimum Maximum Mean
BHAR 318.000 -1.576 7.305 -0.017
Acc 318.000 -0.219 0.315 -0.012
Size 318.000 30.535 40.403 34.937
BM 318.000 -0.002 91.157 1.628
CFO 318.000 -0.314 0.571 0.075
Table 3 shows the results of hypothesis testing without using control variables. The
results of regression analysis testing without using control variables showed that the
accruals had a negative coefficient score (below 0) equal to -1.31432, with a p-value of
0.0739. The score indicates that the company’s accruals have supported having a
significant negative effect on the company’s abnormal returns. However, to ensure the
results of the study, a regression test using control variables was also carried out. The
test aimed to find out whether the negative effect of accruals on abnormal returns will
disappear if company size, market value, and company CFO are controlled. Then, the
results can be seen in Table 4.
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Table 3 Regression Analysis without Control Variables
Variable Coefficient t-statistic P-Value
(Constanta’s) -0.03276 -0.63064 0.52873
Accruals** -1.31432 -1.79317 0.07390
R Square 0.00700
F Statistic 3.25100
F Significance** 0.07400
The results of the regression analysis in Table 4 represent a regression between
independent variables (accruals) and the control variables (Size and BM) toward the
dependent variable (abnormal return). The model formed together with the control
variable had a significance score of 0.138 (significant with a degree of confidence of
15%). It means that the model forming the independent variable, together with the
control variable, was feasible. Then, hypothesis testing using the control variable
showed that the effect of the independent variable (accrual) could negatively affect the
dependent variable (abnormal return). The test result showed a negative coefficient
score of -2.250, as well as a p-value significance that increased by 0.023. An increase in
p-value indicates that the effect of accruals on abnormal returns is more substantial
when tested with control variables. Therefore, the effect of negative accruals on actual
abnormal returns was not caused by differences in company characteristics or market
value or other impacts.
Table 4 Regression Analysis with Control Variables
Variable Coefficient t-statistic P-Value
(Constanta’s) 0.23200 0.24500 0.80700
Accruals*** -2.25000 -2.28600 0.02300
Size -0.00600 -0.20800 0.83500
BM -0.00800 -1.04800 0.29600
CFO -1.07800 -1.39800 0.16300
R Square 0.00941
F Statistic 1.75300
F Significance 0.13800
Furthermore, the portfolio returns were compared between companies with low accrual
rates and companies with high accrual rates in purpose to strengthen confidence
regarding the existence of anomalous accrual phenomena in the Indonesian capital
market. The phenomenon of accrual anomalies can be concluded if there is a negative
influence between the accrual level of the company and abnormal returns. This
phenomenon indicates that investors are mispricing the accrual component. The
mispricing of the accrual component can also be found, if the companies with high
accrual rates considered as undervalued by investors have a greater return compared to
companies with high accrual rates considered as overvalued by investors. To examine
the statement, this article conducted a different test on the company’s abnormal
returns with low accrual rates and high accrual rates, with the following results.
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Table 5 Testing of Low Accrual and High Accrual Portfolios
Years Low Accruals High Accruals t-statistic
All** 0.04539 -0.12002 0.06300
2014 -0.06601 -0.10905 0.55700
2015*** 0.10513 -0.31102 0.01200
2016 0.04090 -0.02162 0.84400
2017 0.10162 -0.08415 0.16700
Table 5 shows that overall companies with low rate accruals always produced greater
returns than companies with high accruals, and the difference was significantly
supported with a p-value of 0.063. Then, if the low accrual and high accrual portfolios
were compared per year, each year, the low accrual portfolio had a greater return than
the high accrual portfolio. However, statistically, only in 2015, the p-value was
concluded to be significant of 0.012.
Thus, based on the results of the regression test in Tables 3 and 4, it is concluded that
accruals had a negative influence on abnormal returns. It means that the lower level of
the company’s accruals will produce higher abnormal returns. Conversely, the higher the
accrual rate, the smaller the abnormal return produced. This situation indicates that
investors in Indonesia are likely to make mistakes in investment decision making.
Investors tend to overvalue companies with high accrual rates and underestimate the
potential of low accrual level companies. Then, they were unaware of the impact of
differences in persistence contained in the earnings component. The comparison of
portfolio tests in table 5 found that companies with low accrual rates had higher returns
compared to companies with high accruals. Thus, it strengthens the evidence that
investors mispriced the components of accrual earnings.
The hypothesis in this study was accepted, meaning that the phenomenon of accrual
anomalies existed in the Indonesian capital market. The investors in the Indonesian
capital market were likely to misprice the accrual component. The mispricing happened
because investors focused only on earnings without considering the potential for
differences persistence of earnings components, leading to the emergence of accrual
anomalies. Such a phenomenon indicates the inefficient Indonesian capital market.
Pincus et al. (2007) state that accrual anomalies correlate with the use of extensive
accrual accounting, common law traditions, weak investor protection, and capital
markets with a low concentration of share ownership. First, in line with Pincus (2007), it
may be that the adoption of IFRS, which emphasizes more on the principle-based, might
cause wider accounting accrual flexibility than the previous standard. It is also consistent
with the findings of Kaserer & Klinger (2008), revealing that accrual anomalies occurred
in companies presenting their financial statements under IFRS or US-GAAP, whereas
anomalies were not detected in companies complying with German GAAP.
Second, in line with Pincus et al. (2007) stating that accrual anomalies might be
triggered by a rating of weak investor protection and the use of a common-law system.
Referring to Leuz, Nanda, and Wysocki (2003) and Putra (2016), Indonesia had a low
level of investor protection. Leuz et al. (2003) in their study, compared investor
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protection in various countries in the world. In their study, Indonesia was classified as a
country with low investor protection, based on the category of investor legal protection,
capital market developments, and ownership concentrations. Meanwhile, Putra (2016)
argues that based on investor legal protection and information protection through
disclosure, Indonesia is considered weak compared to countries such as the United
States, the United Kingdom, and Japan.
Third, it is slightly different from Pincus et al. (2007), who found that accrual anomalies
were found in countries that adopted a common law system compared to code law. This
article discovered that Indonesia, which adopted a code law system, also experienced
the phenomenon of anomaly accruals. This difference might occur because Indonesia
still uses broad accrual accounting standards, and weak investor protection, as explained
in the first and second points.
Fourth, it is different from previous accrual anomaly research in Indonesia, conducted by
Toha and Harahap (2014). This article managed to examine the negative effect of the
accrual rate on abnormal returns. Differences in research results may occur because this
article focused on companies that did not experience losses, causing the phenomenon
of accrual anomalies can be seen more clearly. The results of the study are also in line
with Ozkan and Kayali (2015) and Li et al. (2011), finding that anomalies were clearly
detected if they did not use companies suffering losses. Indeed, the results of this study
are in line with previous researchers who found that anomalies occurred in European
countries, Australia, Germany, and the United Kingdom (Ali & Gurun, 2009; Beer et al.,
2018; Clinch et al., 2012; Kaserer & Klingler, 2008; Li et al., 2011; Papanastasopoulos,
2017; Park et al., 2018). As well as several other studies that found accrual anomalies in
Indonesia, Turkey, and China but with a not too large magnitude (Li et al., 2011; Ozkan &
Kayali, 2015; Toha & Harahap, 2014).
Conclusion
This article aims to examine whether or not the phenomenon of accrual anomalies
existed in the Indonesian capital market. The statistical tests showed that the company’s
accrual rate negatively affected abnormal returns. Furthermore, it was also found that
companies with accrual rates could generate higher returns each year compared to
companies with high accrual rates. The statement depicted that accrual anomalies were
also detected in the Indonesian capital market. Investors in the Indonesian capital
market did not pay more attention to differences in the persistence of the earnings
component and were likely to focus on earnings when making investment decisions. This
phenomenon caused the mispricing of the accrual component.
Indeed, the results of this study contribute to investors and financial analysis to consider
and reevaluate their long-term investment strategies to avoid mispricing in the earnings
component. This article contributes to financial literacy and accounting, especially to the
development of the Indonesian capital market theory, as there is evidence that accrual
anomalies indicate the inefficient Indonesian capital market.
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This research is inseparable from limitations, one of which is the presence of shares that
were not actively traded in the study sample. Second, this article only used a sample of
companies that did not experience a loss. Different results may be obtained if using a
company suffering losses. The future studies, hopefully, can exclude these stocks from
the research sample, to reduce bias in the interpretation of the accrual anomalies
phenomenon. Future studies can also explore types of accruals, such as discretionary
accruals and non-discretionary accruals.
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