Table 3 Stock liquidity and investors'...

Table 3

Stock liquidity and investors' misperception of the persistence of annual accruals

$E_{t + 1} = γ_{0} + γ_{1} \times A C C_{t} + γ_{2} \times C A S H_{t} + υ_{t + 1}$
$A R E T_{t + 1} = β \times (E_{t + 1} - γ_{0}^{} - γ_{1}^{} \times A C C_{t} - γ_{2}^{*} \times C A S H_{t}) + ε_{t + 1}$
Parameter	Estimate	Parameter	Estimate	Parameter	Estimate	Parameter	Estimate
All
$γ_{1}$	0.647^**	$γ_{1}^{*}$	1.039^**	$γ_{1}^{*} - γ_{1}$	0.392^**	$γ_{1}^{*} / γ_{1} - 1$	0.606^**
$γ_{2}$	0.750^**	$γ_{2}^{*}$	0.901^**	$γ_{2}^{*} - γ_{2}$	0.151^**	$γ_{2}^{*} / γ_{2} - 1$	0.201^**
Liquidity: low
$γ_{1}$	0.610^**	$γ_{1}^{*}$	1.124^**	$γ_{1}^{*} - γ_{1}$	0.514^**	$γ_{1}^{*} / γ_{1} - 1$	0.843^**
$γ_{2}$	0.743^**	$γ_{2}^{*}$	0.900^**	$γ_{2}^{*} - γ_{2}$	0.158^**	$γ_{2}^{*} / γ_{2} - 1$	0.212^**
Liquidity: medium
$γ_{1}$	0.652^**	$γ_{1}^{*}$	1.099^**	$γ_{1}^{*} - γ_{1}$	0.447^**	$γ_{1}^{*} / γ_{1} - 1$	0.685^**
$γ_{2}$	0.729^**	$γ_{2}^{*}$	1.014^**	$γ_{2}^{*} - γ_{2}$	0.285^**	$γ_{2}^{*} / γ_{2} - 1$	0.391^**
Liquidity: high
$γ_{1}$	0.637^**	$γ_{1}^{*}$	0.804^**	$γ_{1}^{*} - γ_{1}$	0.166^**	$γ_{1}^{*} / γ_{1} - 1$	0.261^**
$γ_{2}$	0.673^**	$γ_{2}^{*}$	0.689^**	$γ_{2}^{*} - γ_{2}$	0.016	$γ_{2}^{*} / γ_{2} - 1$	0.024

$E_{t + 1} = γ_{0} + γ_{1} \times A C C_{t} + γ_{2} \times C A S H_{t} + υ_{t + 1}$
All
$γ_{1}$	0.647^**	$γ_{1}^{*}$	1.039^**	$γ_{1}^{*} - γ_{1}$	0.392^**	$γ_{1}^{*} / γ_{1} - 1$	0.606^**
$γ_{2}$	0.750^**	$γ_{2}^{*}$	0.901^**	$γ_{2}^{*} - γ_{2}$	0.151^**	$γ_{2}^{*} / γ_{2} - 1$	0.201^**
Liquidity: low
$γ_{1}$	0.610^**	$γ_{1}^{*}$	1.124^**	$γ_{1}^{*} - γ_{1}$	0.514^**	$γ_{1}^{*} / γ_{1} - 1$	0.843^**
$γ_{2}$	0.743^**	$γ_{2}^{*}$	0.900^**	$γ_{2}^{*} - γ_{2}$	0.158^**	$γ_{2}^{*} / γ_{2} - 1$	0.212^**
Liquidity: medium
$γ_{1}$	0.652^**	$γ_{1}^{*}$	1.099^**	$γ_{1}^{*} - γ_{1}$	0.447^**	$γ_{1}^{*} / γ_{1} - 1$	0.685^**
$γ_{2}$	0.729^**	$γ_{2}^{*}$	1.014^**	$γ_{2}^{*} - γ_{2}$	0.285^**	$γ_{2}^{*} / γ_{2} - 1$	0.391^**
Liquidity: high
$γ_{1}$	0.637^**	$γ_{1}^{*}$	0.804^**	$γ_{1}^{*} - γ_{1}$	0.166^**	$γ_{1}^{*} / γ_{1} - 1$	0.261^**
$γ_{2}$	0.673^**	$γ_{2}^{*}$	0.689^**	$γ_{2}^{*} - γ_{2}$	0.016	$γ_{2}^{*} / γ_{2} - 1$	0.024

Note(s): Table 3 reports results from the Mishkin test that investigates the effect of stock liquidity on the extent to which investors overestimate the persistence of annual accruals. E_t+1 is income before extraordinary items of fiscal year t scaled by average total assets of fiscal years t and t+1. ACC_t is the sum of change in net non-cash current operating assets and change in net non-current operating assets from fiscal year t−1 to fiscal year t scaled by average total assets of fiscal year t−1 and t. CASH_t is the difference between E_t and ACC_t. ARET_t+1 is the abnormal annual stock return that cumulates over a 12-month period starting from the fourth month after the end of fiscal year t+1. We follow the characteristic-based portfolio matching procedure proposed in Daniel et al. (1997) to compute the abnormal annual stock return. ^**, ^* and ^† denote statistical significance at the 1%, 5% and 10% levels respectively, using a 2-tailed test

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