The Impact of Abnormal Accruals on Earnings Surprise and the Performance of Firms Listed on the Oslo Stock Exchange

Abstract

This study examines the effect of abnormal accruals on market valuation of earnings surprises and the reversal implications of abnormal working capital accruals for firms listed on the Oslo Stock Exchange. We hypothesize that firms with “good news” (positive earnings surprise) and income-increasing abnormal working capital accruals will have a lower Earnings Response Coefficient (ERC) than “good news” firms with income-decreasing abnormal working capital accruals. Similarly, we expect “bad news” (negative earnings surprise) firms with income-increasing abnormal working capital accruals to have a higher ERC than “bad news” firms with income-decreasing abnormal working capital accruals. By analyzing financial reports, stock prices, and estimated earnings, we aim to understand the market’s response to positive and negative earnings surprises. Our findings suggest that the market fails to foresee the reversal implications of abnormal accruals and struggles to incorporate both the positive impacts of income-decreasing abnormal accruals and the negative impacts of income-increasing abnormal accruals. Furthermore, we find that the market is sensitive to earnings surprises and reacts thereby, supporting our initial expectation suggesting that companies with positive (negative) earnings surprises are likely to experience a corresponding increase (decrease) in their stock prices in the days following the earnings announcement.