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The Implications of Retained and Distributed Earnings for Future Profitability and Market Mispricing

Author

Listed:
  • George Papanastasopoulos

    (University of Peloponnese, Greece)

  • Dimitrios D. Thomakos

    (University of Peloponnese, Greece and The Rimini Centre for Economics Analysis, Italy)

  • Tao Wang

    (Queens College, City University of New York, USA)

Abstract

In this paper, we investigate the informational content of retained and distributed earnings for future profitability and market mispricing. We find that investors act as if the components of retained earnings (current operating accruals, non current operating accruals and retained cash flows) have similar implications for future profitability, leading to an overvaluation of their differential persistence. They also do not distinguish between the distinct properties of distributed earnings, correctly anticipate the persistence of net cash distributions to debt holders (net debt repayment) and underestimate the persistence of net cash distributions to equity holders (dividends minus net stock issues). Our evidence suggests that the accrual anomaly documented in the accounting literature and the anomaly on net stock issues documented in the finance literature could be a subset of a larger anomaly on retained earnings. Overall, our findings on the sources of this anomaly, indicate that it is primary attributable to investorÕs limited attention or limited cognitive power on understanding managerial empire building tendencies and managerial violation of accounting principles.

Suggested Citation

  • George Papanastasopoulos & Dimitrios D. Thomakos & Tao Wang, 2007. "The Implications of Retained and Distributed Earnings for Future Profitability and Market Mispricing," Working Paper series 46_07, Rimini Centre for Economic Analysis.
    • Handle: RePEc:rim:rimwps:46_07
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    References listed on IDEAS

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    Cited by:

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    2. Gikas Hardouvelis & George Papanastasopoulos & Dimitrios D. Thomakos & Tao Wang, 2007. "Accruals, Net Stock Issues and Value-Glamour Anomalies: New Evidence on their Relation," Working Paper series 47_07, Rimini Centre for Economic Analysis.

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    More about this item

    Keywords

    retained earnings; distributed earnings; accruals; net stock issues; earnings management;
    All these keywords.

    JEL classification:

    • M4 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting

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