Earnings persistence and the accrual anomaly: An investigation on Borsa Istanbul

This study investigates the presence of the accrual anomaly in Borsa Istanbul. In accordance with this purpose, the persistence of earnings and its components of 158 firms traded in Borsa Istanbul between the years of 2005-2012 are first tested using panel data analysis methodology. The results of the study indicate that earnings are persistent in Borsa Istanbul. Moreover, the total accrual component of earnings has a weak effect on the persistence of earnings in comparison with the cash flow component of earnings. This is mainly due to abnormal accrual component of earnings. Secondly, we will seek to answer in this study whether stock prices reflect information accurately about future earnings contained in the cash flow and accrual components of earnings. In this context, Mishkin and hedge portfolio tests are performed. Mishkin and hedge portfolio test results do not prove that earnings and its components are mispriced in Borsa Istanbul. On the other hand, removal of the loss-making firms from the related sample, mispricing of total accruals and its components, in other words, the presence of the accrual anomaly in Borsa Istanbul, are demonstrated. Trading strategy based on the total accruals of profit-making firms, investors generate abnormal returns of 18,58%. These results signify that Borsa Istanbul is not semi-strong form efficient. The findings obtained in this study are of great importance for investors, equity analysts and researchers. Keywords: Earnings, Cash Flows, Accruals, Earnings Persistence, Accrual Anomaly, Mispricing, Market Efficiency