Young Zik Shin
This paper examines whether the normal and abnormal cash component of earnings are rationally priced through the capital market, and if not, which cash component of earnings is more irrationally priced. I find that the market underestimates the persistence of the cash component of earnings and more importantly, the underpricing of the cash component of earnings mainly stems from the normal portion of cash component. In addition, I investigate whether the market perceives managers’ opportunistic cash flow manipulation, and the result indicates that the market still fails to recognize managed cash flows.