“Capital Investment Anomaly” and “Accruals Anomaly”: Independent or Inter-Dependent? – Evidence from South Asia

Abdul Rafay, Ramla Sadiq, Shahzeb Ahmed

Abstract


ABSTRACT

The purpose of this research is to determine the impact of “Capital investment anomaly” and “Accrual anomaly” on stock returns after controlling the size and book-to-market effects. This study aims to fill a gap regarding the implications of capital investment anomaly and accrual anomaly in South Asian economies, and primarily focused on two developing economies from SAARC region; India and Pakistan. This study uses 320 company-year observations using a sample period of 2009-2014. The sample is representative of 50% of non-financial companies selected systematically from nine different sectors included in Pakistan Stock Exchange (KSE-100 index) and Bombay Stock Exchange (BSE-100 index) each. Selection is based on market capitalization to mitigate any bias in results. Preliminary analysis includes understanding stock performance of capital investment-based, and accrual-based portfolios, followed by stock performance of combined effect portfolios, and sector analysis. Lastly, regression analysis allows determining impact of both anomalies on returns as well as their independence or interdependence. The results of this study show that there exists a negative relationship between Stock Returns and Capital Investment/Accruals. In addition to this, we found that both anomalies are not distinct and work together and are attributed to country characteristics specific to the SAARC/South Asia region. All of the coefficients are statistically significant. The separate results for India and Pakistan are helpful for practitioners to know what strategy to adopt in order to maximize the returns. Combined results are beneficial for prospective investors. The mixed trend of returns for different sectors is useful for both managers and investors in the sense that both anomalies are independent of each other. From a theory development perspective, it reveals the differences in existing literature due to change in geographical context.

Keywords: Accruals anomaly; capital investment anomaly; India; Pakistan; sector analysis


ABSTRAK

Tujuan penyelidikan ini adalah untuk menentukan kesan "Anomali pelaburan modal" dan "Anomali terakru" ke atas pulangan saham selepas mengawal faktor saiz dan kesan nilai buku-kepada - nilai pasaran. Kajian ini bertujuan untuk mengisi jurang mengenai implikasi anomali pelaburan modal dan anomali terakru dalam ekonomi Asia Selatan, terutamanya tertumpu kepada dua ekonomi membangun dari rantau SAARC; iaitu India dan Pakistan. Kajian ini menggunakan 320 pemerhatian bilangan syarikat-tahun bagi tempoh sampel 2009-2014. Sampel ini masing-masing mewakili 50% syarikat bukan kewangan yang dipilih secara sistematik daripada sembilan sektor yang berbeza dalam Bursa Saham Pakistan (indeks KSE-100) dan Bursa Saham Bombay (BSE-100 indeks). Pemilihan adalah berdasarkan permodalan pasaran bagi mengurangkan sebarang bias dalam keputusan. Analisis awal merangkumi pemahaman prestasi saham berasaskan pelaburan modal, dan portfolio berasaskan nilai terakru, diikuti dengan prestasi saham bagi kesan portfolio gabungan, serta analisis sektor. Akhir sekali, analisis regresi menentukan kesan kedua-dua anomali pada pulangan serta faktor bebas atau saling kebergantungan mereka. Hasil kajian menunjukkan terdapat hubungan negatif antara Pulangan Saham dan Pelaburan Modal/Akruan. Di samping itu, kami mendapati bahawa kedua-dua anomali tidak berbeza dan bekerjasama serta dikaitkan dengan ciri-ciri khusus negara untuk SAARC/rantau Asia Selatan. Semua koefisien adalah signifikan secara statistik. Hasil yang berasingan untuk India dan Pakistan sangat berguna bagi para pengamal untuk mengetahui strategi yang sesuai untuk memaksimumkan pulangan. Gabungan keputusan juga adalah bermanfaat untuk bakal pelabur. Trend pulangan yang bercampur bagi sektor yang berlainan berguna untuk kedua-dua pengurus dan pelabur dalam erti kata bahawa kedua-dua anomali adalah bebas antara satu sama lain. Dari perspektif pembangunan teori, ia mendedahkan perbezaan dalam literatur sedia ada akibat daripada perubahan dalam konteks geografi.

Kata kunci: Anomali terakru; anomali pelaburan modal; India; Pakistan; analisis sektor


Keywords


Accruals anomaly, Capital investment anomaly, India, Pakistan, Sector analysis

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