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Unformatted text preview: Problem Set 4 NBA 598 Behavioral Finance Nikola Pikula, Joyce Wang, Mengchao Wu, Siming Zhu March 5, 2008 1. a. Factors that can cause a firm to have high accruals for a particular year are: changes in working capital due to recent growth, worsening business conditions for the year which could lead to an increase in inventories and receivables, and potential earnings management practices. High accruals are not completely driven by managers’ desire to manage earnings because some managers are taken by surprise by worsening business conditions, and as a result, accruals increase. However, there are some managers who intentionally manipulate accruals to drive up earnings. b. The positive returns of such a hedged portfolio are due to mispricing. In general, investors concentrate on earnings and do not necessarily distinguish between the cash and accrual portions of earnings. Since high accrual stocks tend to have higher earnings, investors see this portions of earnings....
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This note was uploaded on 04/20/2008 for the course NBA 5980 taught by Professor Huang,ming during the Spring '08 term at Cornell University (Engineering School).
- Spring '08