Accruals, cash flows, and operating profitability in the cross-section of stock returns in Korean security markets

Abstract

This paper studies the characteristics of cash-based operating profitability (CbOP) and its relationship between accrual anomalies in Korean equity market. As a result, we have shown that CbOP can effectively but not “completely” explain the accrual anomaly and does a better job explaining the anomaly over accrual-based operating profitability. Furthermore, when we implement a RMW factor based on cash-based operating profitably (RMW_CbOP) into Fama French factor models, the five-factor model with RMW_CbOP intuitively outperforms with respect to pricing the accrual anomalies over RMW based on operating profitability (RMW_OP), as far as KOSPI equity universe is concerned.