Workshop Series: Philip Shane
Evaluating persistence and market pricing of earnings components, Dechow, Richardson and Sloan [DRS] disaggregate free cash flow into changes in cash and distributions to providers of capital. We further decompose changes in cash into normal components that move firms towards optimum levels of cash holdings and abnormal components that can be positive or negative and, respectively, create either excess or insufficient cash holdings. Negative abnormal changes in cash potentially lead to missed opportunities to invest in positive NPV projects and lower future earnings. Positive abnormal changes in cash potentially lead to wasteful investment and relatively lower future earnings. We hypothesize and find that negative abnormal changes in cash have greater persistence than positive abnormal changes. We also show that the market underreacts to negative abnormal changes in cash. Contrary to the DRS hubris interpretation, we find no evidence of market inefficiency with respect to positive abnormal changes in cash. Keywords: Earnings Persistence; Free Cash Flow; Abnormal Changes in Cash Holdings; Market Efficiency JEL Classification: M41, G14
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Phil Shane is a Professor of Accounting in the Leeds School of Business at the University of Colorado at Boulder and in the Auckland Business School at the University of Auckland. He held the Financial Accounting Standards Board (FASB) Academic Research Fellow position for the year ending 31 July 2011, and will start a new position as Professor of Accounting in the McIntire School of Commerce at the University of Virginia as of 25 August 2011.
Professor Shane’s research and teaching interests include financial statement analysis, the quality of financial reporting, market inefficiencies in the production and use of accounting information, and the role of accounting information in understanding societal effects of corporate activities. Recent teaching responsibilities include courses in financial reporting, financial statement analysis and doctoral seminars in accounting-related capital markets research.
Prior to joining the University of Colorado, Dr. Shane taught in undergraduate, MBA, and doctoral programs at The Pennsylvania State University, the University of Auckland, the University of Arizona, San Diego State University, the University of Montana, and the University of Kansas. Prior to his academic career, he worked in the audit and tax areas at the Chicago office of PricewaterhouseCoopers.
Dr. Shane is active in the American Accounting Association and is a past president (2007-2008) of the association’s Financial Accounting and Reporting Section (FARS).
Dr. Shane received his B.S. degree in Accountancy at the University of Illinois and his Ph.D. in Business at the University of Oregon. His research appears in leading academic journals, including Accounting and Finance, The Accounting Review, Contemporary Accounting Research, the International Journal of Forecasting, and the Journal of Accounting Research.