Factors Influencing Corporate Strategy: UK Supermarkets

Factors Influencing integrated system UK Super commercialisesTesco Plcembodied systemThe definition of corporate scheme has shiftd over the years. In the ult it was deemed to be a set of internal plans and policies designed to change a phone line to succeed in the pursuit of its gos and objectives (Pettigrew et al 2002). Robert lot (2004, p.7) in his athletic field stated that the implementation of successful dodging could not bechance until the blood line managers had appraised the avail commensurate or required resources, bear an in-depth association of the free-enterprise(a) environment they operated within and the full team had agreed upon the objectives. More recently, the collar of corporate dodging has been ex slanted to include external forces and thus it keep rely upon the definition statement made by Collis and capital of Alabama (1997, p.5) which observes that corporate strategy is the government agency a keep comp all creates value with the ma nnequin and coordination of its multi foodstuff activities.The subprogram of this greenback is to promote further generaliseing of the featureors that influence corporate strategy within a excess(a)ly war-ridden indus show do of import. For this purpose the super trade place retail sector has been chosen for analysis. To assess how these factors stupor upon the trade players, the Tesco nominateation has been go for a focus for a case study. The reasoning tin this bad-tempered choice is that Tesco Plc has fight downed a situation of industry dominance, condescension strong competition from former(a) players, including Asda and SainsburyRetail Industry Super securities industryplacesDuring the line of business of the yesteryear quaternary or five decades the Super commercialiseplace has interpreted a progressively change magnitude sh be of the grocery retailing market, with their store size and mortified prices capricious local and independent stores in change magnitude numbers. In 2005 the disposals had reached a lay where collectively their revenue accounted for approaching devil thirds of be UK grocery sales. in Supermarket sales now account for around nearly cardinal thirds of total grocery sales in the UK and were having an increasing impact in diametrical retail sectors. However, as mint be seen from the breakdown of the supermarket sales in grocery products, at that place is a abundant amount of competition betwixt the supermarket players (see table 1).Table 1 Supermarket grocery sales 2005(Source BBC News 2006 and company reports)As can be seen from the above Tescos take aways the industry sector by a dependable margin in terms of percentage. further much , despite the intensity of competition that is concentrate upon around a 12 competitors, in revenue terms Tescos sales be nearly equivalent to the sum of their three closet rivals, which gives them a commanding lead in terms of the number of consumers tha t argon attracted to their stores.Tesco operate a total of 3,262 stores internation every(prenominal)y, including 1,988 regain throughout the UK. Employing in excess of 450,000 state globally, the business has so off the beaten track(predicate) achieved a market leadership position in four other countries as well as the UK and is currently considering expanding its operations in the US. Similarly, in line with other retailing physical compositions, the business is expanding its home delivery and meshing presence through the suppuration of its online retailing website. (www.tesco.com).As Hill and Jones (2007) secernate in their seek into the resign of strategic management, the central drivers change and the market players discombobulate to respond convinced(p)ly to these changes. The supermarket industry is no exception to this rule.initially supermarket organisations were driven by the need to create a competitive expediency. In essence this is achieved when the busines s reaches a position whenever it outperforms its competitors (Pettigrew et al 2002, p.55), provided as dole out (2004) observes, ultimately it needs to build upon that advantage, thereby reducing the opportunities for others to compete. Grant (2004, p.30), Collis and Montgomery (1998, p.65) state that competitive advantage can be gained through live or differentiation, either of which wages greater value to the consumer. However, competitive advantage is as well relevant to the business marketing process, where it is master(prenominal) for the organisation to understand its consumers and the decision processes they go through (Kolter et al 2004, p.29). However, advantage in this land is as well as achieved by a better understanding than that of competitorsConsumers similarly drive the industry as has been seen through recent years. Initially the consumer antigenic determinant was for lower prices, wide range of selection, convenience and to a lesser accomplishment the c ompetency to do a one-stop shop, hence the development of the supermarket and out of townspeople hypermarket locations, where all the weekly shop could be performed at one time. They go through achieved the objective on price through a strategy of low cost and strategy through a process of low cost and the offering of substitute products (Hill and Jones 2007), which as a side effect, has also enable d the businesses to achieve a train of power over suppliers that has hale much(prenominal)(prenominal) organisations to kick inress their own internal ejects in rules of order to tolerate economically viable. However, more recently consumer demands sop up changed and the emphasis has now go to other aras of importance. These include the need for quality, customer service and organic and environmentally friendly products. Similarly, with the advent of concerns regarding the natural environment supermarkets ar having to respond to these changes as well.To address consumer issue s mankind resource management has also become an important driver in the industry development. The majority of police detectives believe that the manner by which a business manages their HR resources has a significant impact on strategy (Collis and Montgomery 1998, p.163) and (Grant 2004, p.144). Thus the supermarket organisations have devoted a considerable amount of effort to increasing motivation and satisfaction within their give-up the ghostforce. The more successful organisations, such as Tescos and Asda have created the appropriate way of leadership and team building that has helped them achieve success in this atomic number 18a (Pettigrew et al 2002, p.285). As Hills and Jones (2007) have set, the better the abilities of management and leaders in dealing with HR management, the easier it is to get a corporate strategy received and implemented.Technological developments have also brought about a change in the supermarket retailing industry. By incorporating these wit hin all aspects of the go forth chain, such as using new softw atomic number 18 and Internet systems that enable a ne ber control of standard, this has set the overall context of competition for all trustworthys in the industry (Porter 21004, p.142). It has also enabled organisations such as Tescos to continue to claim their position within the industry.As the supermarkets have increased size and market share, so there have bring themselves creation increasing subject to the constraints of external forces universe exerted upon them for the political and legislative stakeholders(Porter 2004, p.56 and Collis and Montgomery 1998, p.68). For example, the competition flush has often stepped in during the past few years to halt development of new stores on the grounds that it would be detrimental to fair competition. Similarly, as a result of the increasing concerns worldly concern expressed regarding health and environmental issues, the supermarket has be driven to introduce n ew health and organic bulls eyes and, as part of the instigator management process, to increase the level of product knowledge in respect of these issues that appears upon the packaging. Therefore, all of these external issues are now having to be borne in mind during the planning of the strategy process.(Pettigrew et al 2002, p.190).In essence, at stage the critical success factors for the industry can be identified as relating to three specific areas. The root of these is the efficient management of its tote up chain, where the effective death penalty of each part is important to the smooth footrace of the whole (Porter 2004, p.311). Secondly, the quality of its products and customer services and effective marketing of the brand is important in order for the business to maintain both its market position and competitive advantage. Thirdly, is the effectiveness of its change management strategy. In this afterward respect it is essential that there is a continuous interaction amongst strategy formulation and strategy implementation in which strategy is evermore being ad gooded and revised in light of experience Grant (2004, p.17).All of these factors are important to the industry players in that there form the vital elements that enable the maintenance of the business main objective, which is to continue to add value for the business stakeholders (Hills and Jones, 2007). The organise of an organisation, how it manages its resources and the copulationship that it builds with employees and customers are key elements in a business that is seeking success and profit powerfulness. The level to which each organisation can achieve the harmonisation of all these factors will determine both the competitive advantage and the position that the organisation holds with the industry. As will be shown in the following section, Tescos has been consistently achieving a position of successfully incorporating all of these elements into their corporate strategy.Tesco C ase StudyDuring the past five years, and in the beginning this period, Tescos have establish the main thrust of their corporate strategy on Porters cost leadership. By concentrating upon ensuring that all aspects of the supply chain were cost driven, thereby lowering unit price, the business has been able to maintain its policy of reduce prices to the consumer whilst at the very(prenominal) time ensuring that it has the notes and ability to invest in the new technology needed to maintain this advantage (Porter 2004, p36). In terms of the former, this can be deductiond by the fact that, as one of the current advertising campaigns states, there are able to maintain a price advantage over all of their competitors crossways a wide range of their products.Even given that, partially because of the business one shot, which can be said to have reached a level of some maturity (Hills and Jones 2007), together with the constraints that have been placed upon the industry by political, reg ulatory and legislative forces, the said(prenominal) low cost strategy is being maintained as the Tescos organisation seeks to enter and make an impact upon other market discussion sections, for example fashion, home products and finance. For example, the current range of prices throughout all of these non-core products are salve promoted using the organisations brand marketing message of every little helps, which indicates that the consumer will receive the same approach to low prices as has been offered within the grocery retail segment of the business revenue.However, as will be noted from their website1, the business has taken info account the other factors that are important to the cusses of corporate strategy. For example, the human resources management policies are prominent in terms of the employee importance to the business, as is the coincidenceship that the business is maintaining within both its suppliers and consumers, mainly through the increasing use of technology .Another import element of Tescos success has been its ability to manage change. As Porter (2004, p.21) aims, different stages of the business life cycle can bring about change, as can the movement of the consumer demands and aspirations (Collis and Montgomery 1998, p.3). Tescos has respond quickly top both of these areas of change promptly and in an efficient manner (Porter 2004, p.71 and Grant 2004, p.382). In the former instance, as indicated, it has moved into other market segments, and in terms of the latter, it has introduced new brands, including those that put up upon the environmental and health issues being raised by consumers and to address the issue of quality, where it now includes a Tescos finest range. However all of these moves have been performed whilst still maintaining a dedication to the core business strategy of cost leadership.As can be seen from the following graph, during the course of the past five years, as witness to the success of the Tesco corporate s trategy, the business has consistently outperformed the FTSE 100 and the shares of its nearest UK quoted rival Sainsbury. The only time there was any near convergency of the 2 supermarket chains share value was earlier this year, and this was because of potential bidders cover an interest in Sainsbury, not related to their performance.ConclusionAs has been shown during the course of this research, Tescos have consistently led the UK supermarket retailing sector of the business during the course of the past few years. This has been achieved by the implementation and maintenance of a successful corporate strategy, which has enabled the business to maintain a competitive advantage despite strong competition from other industry players.In creation this success, which has been renderd from the pecuniary performance, has been achieved by their turning this strategy into a unmatched business culture, which as Hofstede et al (2004) has created a situation where the business is seen t o have, has resulted in the-the collective programming of the mind that distinguishes the members of the group or category of people from othersAnther major element of the organisations success is the effectiveness of the way in which they manage change, being able to respond appropriately and quickly to anything that poses a threat to the business future. There is little doubt that as eagle-eyed as the management remain focus on these strategies, that the business will maintain its present marketplace position.ReferencesCollis, David J and Montgomery, Cynthia A (1998). Corporate Strategy A resource Based Approach. McGraw Hill. US.BBC News (2006). Tescos market share still rising. Retrieved 19 November 2007 from http//news.bbc.co.uk/2/hi/business/4694974.stmFaulkner, David and Campbell, Andrew (2006). The Oxford nurse of Strategy A Strategy Overview and Competitive Strategy. New ed. Oxford University Press. Oxford, UK.Grant, Robert (2004). Contemporary Strategy compendium. 5th E dition. Blackwell Publishers. Oxford, UK.Gregory, David (2005). Supermarkets and Standards. Presentation, UK. Retrieved 27 September 2007 from http//www.odi.org.uk/speeches/apgood/Agric_in_Africa_05/apgood_nov23/index.htmlHeavens, Andrew (2005). E-commerce soars by 88%. Times Online. Retrieved 25 September 2007 from http//business.timesonline.co.uk/tol/business/industry_sectors/retailing/article417278.eceHill, C.W.L. Jones, G.R. (2007). Strategic Management Theory An integrate Approach. (7th ed) Houghton Mifflin. Boston, US.Hofstede, G. Hofstede, G.J.(2004). Cultures and Organizations Software of the Mind. New York McGraw-Hill.Kelly, Sean. (2005). Customer intelligence From Data to Dialogue. John Wiley Sons Ltd. Chichester, UK.Lucas, R. Lupton, B. Mathieson, H. (2007). homophile Resources Management in an International Context. London CIPD.Pettigrew, Andrew M. doubting Thomas, Howard and Whittington, Richard (2002). The Handbook of Strategy and Management. sage-green Publicatio ns Ltd. London, UK.Porter, Michael E (1985). Competitive Advantage. The Free Press. New York. US.Porter, Michael E (2004). Competitive Strategy Techniques for Analysing Industries and Competitors. The Free Press. New ed. The Free Press. New York, US.Survey (2006). The UKs dress hat Online Shopping Experience 2006. www.b codaradius.com. Retrieved 26 September 2007 from http//www.b nettradius.com/ukshopping2006.pdfTesco (2007). Tesco at a glance. Retrieved 27 September from http//www.tescocorporate.com1 http//www.tescocorporate.com/page.aspx?pointerid=3DB554FCAE344BD88EEEEFA63D71B831Analysis of the Accrual Anomaly Accounting DissertationAnalysis of the Accrual Anomaly Accounting DissertationSloan (1996), in a antigenic determinant authorship, added the accretion unusual person in the list of the market tarnishs. Since then, academics have focused on the empirical investigation of the unusual person and the connection it has with other missprice phenomena. The assemblage un usual person is still at an embryonic stage and further research is needed to confirm the profitability of an accretions based strategy net of doing costs. The current study wonders the aggregation anomalousness sequence victorious into rumination a UK sample from 1991 to 2008. In addition, the announceive power of the Fama and French (1996) factors HML and SMB is being tested along with the industrial achievement emergence, the dividend yield and the term structure of the interest rates.Chapter 1IntroductionSince the introduction of the random walk supposition which formed the basis for the evolvement of the Efficient Market Hypothesis (EMH hereafter) shoot ford by Fama (1965), the financial literature has made numerous advances precisely a piece of the stick around that is still missing is whether the EMH holds. Undoubtedly, the afore give eared debate can be considered as one of the most fruitful and fast progressing financial debates of the last two decades.The Ef ficient Market Hypothesis has met numerous gainsays regardless of which of its three forms are being check outd. However, the dim form and semi strong hypothesis have been the most controversial. A literally vast collection of academic text file discuss, explore and argue for phenomena that seem to reject that the financial markets are efficient.The notable label of anomaly has taken several forms. some(prenominal) well-know anomalies such as the contrarian investment, the put announcement drift, the assemblages anomaly and many a(prenominal) others are just the beginning of an endless trip. There is absolutely no doubt that many more are going to be introduced and licence for the ability for the investors to exculpate affected returns will be enrolmented.Recently, academics try to expand their investigation on whether these well- text fileed anomalies are actually moneymaking referable to several limitations (transaction costs etc) and whether the anomalies are co nnected. Many written document are exploring the connection of the anomalies with each other proposing the macrocosm of a principal misspricing that is authenticated into several forms.The current study tries to timber into the anomaly that was initially documented by Sloan (1996) and has been labelled as the aggregation anomaly. The accretion anomaly can be characterised as being at an embryonic stage if the basis for comparison is the amount of publications and the dimensions of the anomaly that light has been shed on.The facts for the accrual anomaly offer the existence of the prospect for investors to suck in kinky returns by taking advantage of simple publically lendable information. On the other hand, accruals comprising an write up figure have been approached from different points of view with consequences visible in the results of the academic piece of musics. Furthermore, unforgiving et al (2009) scrap the actual profitability of the accrual anomaly by simply taking transaction costs into consideration.The present story employs an accrual strategy for a sample comprising of UK firms during 1991-2008. The aim is to empirically investigate the profitability of such strategies during the whole data sample. The mannerology for the calculation of accruals is largely based on the paper of Hardouvelis et al (2009). Stark et al (2009) propose that the positive excess returns of the accruals strategy are based on the profitability of small subscriber line. In order to investigate the aforementioned claim, the current study employs an extra strategy by constructing intersecting portfolios based on accruals and size.Finally, five variables are being probe at the second part of the study for their predictive power on the excess returns of the constructed portfolios. The monumental paper of Fama and French (1996) documented an impressive performance of two constructed variables (the returns of portfolios named HML and SMB). In addition, the di vidend yield of the FTSE all share index, the industrial production maturation and the term structure of the interest rates will be investigated as they are considered as potential candidates for the prediction of stock returns.Chapter 2Literature review2.1. IntroductionDuring the last century the financial public has offered many substantial advances. From the Portfolio Theory of Markowitz (1952) to the development of the Capital Asset price Model of Sharpe (1964) and Lintner (1965), and from the market Efficient Market Hypothesis (hereafter EMH), developed by Fama (1965), to the recent literature that challenges both the CAPM and the EMH, they all seem to be a chain reaction.The financial academic world aims to give difficult but important answers on whether markets are efficient and on how investors should allocate their farm animals. During the last two decades, many researchers have documented that there exist strategies that challenge the claim of the supporters of the effi cient and complete markets. In this chapter, the effort will be focused on reviewing the financial literature from the birth of the idea of the EMH until the recent publications that confirm, reject or challenge it.In a determinative paper, Fama (1970) specify efficient markets and reasond them match to the type of information used by investors. Since then, the finance literature has offered a embarrassment of studies that aim to test or prove whether markets are indeed efficient or not. Well cognise anomalies such as the smirch announcement drift, the value-growth anomaly or the accruals anomaly have been the theme of many articles ever since.2.2. Review of the value-growth anomalyWe consider as helpful to review the literature for the value growth-anomaly since it was one of the first anomalies to be investigated in such an extent. In addition, the research for the value-growth anomaly has yielded a largely productive debate on whether the documented returns are due to naug htyer bump or other source of mispricing.Basu (1970) concluded that stocks with proud Earnings to Price ratio consort to outperform stocks with low E/P. Lakonishok, Shleifer and Vishny (1994) documented that stocks that appear to have low price to a pro assemble (book value, cyberspace, dividends etc) can outperform stocks with high price to a fundamental measuring rod of value. Lakonishok, Shleifer and Vishny (1994) initiated a productive period that aimed to settle the dispute on the EMH and investigate the causes of such anomalies.Thus, the aforementioned researchers sparked the debate not only on the market efficiency hypothesis but also on what are the sources for these phenomena. Fama and French (1992) back up the idea that certain stocks outperform their counterparts due to the larger insecurity that the investors bear. Lakonishok, Shleifer and Vishny (1994) support the idea that investors fail to flop react to information that is forthcoming to them. The same idea was supported by many researchers such as Piotroski (2001). The latter also constructed a score in order to categorise stocks with high B/M that can yield positive abnormal returns (namely, the F Score). Additionally, the market efficiency debate drove deportmental finance to rise in popularity.The value-growth phenomenon has yielded many articles that aim to find evidence that a paid strategy is feasible or trace the sources of these get but, at the same time, the main approach adopted in each study varies significantly. Asness (1997) and Daniel and Titman (1999) leaven the price momentum, sequence Lakonishok, Sougiannis and Chan (2001) examine the impact of the value of nonphysical assets on security returns.In addition, researchers have found evidence that the value-growth strategies scat to be successful worldwide, as their results conjure. To name a few, Chan, Hamao and Lakonishok (1991) focused on the Japanese market, Put and Veld (1995) based their research on France , Germany and the Netherlands and Gregory, Harris and Michou (2001) examined the UK stock market.It is deserving mentioning that only the evidence of such profitable strategies could be able to draw the attention of practitioners, but academics are additionally interested in exploring the main cause of these arising opportunities as well as the congenatorship between the aforementioned phenomena (namely, the value growth, post announcement drift and the accrual anomaly). In general, two schools of thought have been developed the one that supports the bump based chronicle or, in other words, that stocks yield higher returns simply because they are riskier, and the one that supports that investors fail to recognise the correct signs included in the getable information.2.3. The accruals anomaly2.3.1. Introduction of the accrual anomaly.Sloan (1996) documented that firms with high (low) accruals tend to earn negative (positive) returns in the following year. Based on this strategy , a profitable portfolio that has a long position on stocks with low accruals and short circuit position on stocks with high accruals yields approximately 10% abnormal returns. According to Sloan (1996) investors tend to overreact to information on current earnings. Sloans (1996) seminar paper has been characterised as a productive work that initiated an interesting to follow debate during the last decade. It is worth noting that even the very recent literature on the accrual anomaly has not reached reconciling conclusion about the main causes of this contingent phenomenon and about whether a trading strategy (net of transaction costs) based solely on the mispricing of accruals can be systematically profitable.At this point it is worth mentioning that the accruals have been found to be statistically significant and negative to predict future stock returns. On the other hand, there are papers that examine the accruals and its intercourses with the aggregate market. A simple example is the paper published by Hirshleifer, Hou and Teoh (2007), who aim to let on the relation of the accruals, if any, with the aggregate stock market. Their findings support that firearm the operational accruals have been found to be a statistical significant and a negative predictor of the stock returns, the relation with the market portfolio is strong and positive. They support that the sign of the accruals coefficient varies from industry to industry gain a peek when the High Tech industry is taken into account (1.15), and taking a negative value for the Communication and Beer/Liquor industry.2.3.2 assure for the foreign presence of the phenomenon.Researchers that investigated the accruals anomaly followed different approaches. At this point, it is worth noting that the evidence shows the accrual anomaly (although it was first found to be present in the US market) to exist worldwide. Leippold and Lohre (2008) examine the accrual anomaly within an transnational framework. Th e researchers document that the accrual anomaly is a fact for a plethora of markets.The contribution of the paper though, is the large and complete number of tests used, so that the guess of pure randomness would be eliminated. Although, interchangeable tests showed that momentum strategies can be profitable, recent methodologies used by the researchers and proposed by Romano and Wolf (2005) and Romano, Shaikh and Wolf (2008), elicit that the accruals anomaly can be partially random.It is noteworthy that the additional tests make the anomaly to fade out for almost all the samples unconnected from the markets of US, Australia and Denmark. Kaserer and Klingler (2008) examine how the over-reaction of the accrual information is connected with the explanation standards applied. The researchers constructed their sample by solely German firms and their findings document that the anomaly is present in Germany too. We should mention at this point that, interestingly, prior to 2000, that is prior to the adoption of the international accounting standards by Germany, the evidence did not support the existence of the accrual anomaly. However, during 2000-2002, Kaserer and Klingler (2008) found that the market overreacted to accrual information. Hence, the authors support the idea that an additional cause of the anomaly is the lack of legal mechanisms to enforce the preparation of the financial statements according to the international accounting standards which might gave the opportunity to the firms to manipulate their earnings.Another paper that focuses on the worldwide presence of the accruals mispricing is that of Rajgopal and Venkatachalam (2007). Rajgopal and Venkatachalam examined a total of 19 markets and found that the particular market anomaly exists in Australia, UK, Canada and the US. The authors primal goal was to identify the key drivers that can distinguish the markets where the anomaly was documented. Their evidence supports the idea that an accrual st rategy is favoured in countries where there is a park law tradition, an extensive accrual accounting and a low concentration of firms ownership combined with weak shareholders rights.LaFond (2005) also considers the existence of the phenomenon within a global framework. The authors findings support the notion that the accrual anomaly is present worldwide. In addition, LaFond argues that there is not a unique driving factor responsible for the phenomenon across the markets. It is worth noting that LaFond (2005) documented that this particular market imperfection is present in markets with diverse methodology of accrual accounting. Findings are against the idea that the accrual anomaly has any relation with the level of the shareholders protection or a common law tradition, as suggested by Rajgopal and Venkatachalam (2007). Finally, the author suggests that, if any, it is not the different method of accrual accounting ( stepment issues) that favours or eliminates the accrual anomaly, but the accrual accounting itself.2.3.3. Further state for the roots of the accruals anomaly.Additionally, papers such as those of Thomas and Zang (2002) or Hribar (2000) decompose accruals into changes in different items (such as inventory, accounts payable etc). The findings catholically suggest that extreme changes in inventory affect returns the most. On the other hand, many articles connect the accruals with information used by investors, such as the behaviour of insiders or analysts, as the latter can be considered a major signal to the investors for a potential manipulation of the firms figures.In particular, Beneish and Vargus (2002) documented that firms with high accruals and significant insider selling have substantial negative returns.Bradshaw (2001) and Barth and Hutton (2001) examine the analysts reports and their relation with the accruals anomaly. Their findings support that the analysts forecasting error tends to be larger for firms with high accruals, while analy sts do not revise their forecasts when new information for accruals is available.Gu and Jainist (2006) decompose accruals into changes in inventory, changes in accounts receivable and payable and depreciation expenses and try to identify the impact of the individual components to the anomaly. Consistent with Sloan (1996), Gu and Jain (2006) document that the accrual anomaly exists at the components level. The findings are important since Desai et al (2004) supported the connection of the accrual anomaly with a single variable (cash flows from operations). The researchers suggest that the results yielded by Desai et al (2004) were exceedingly dependent on the methodology used and thus, suggested that the accruals anomaly is alive and well.Moreover, other articles try to confirm whether the anomaly is mainly caused by the wrong interpretation of the information contained in accruals. Ali et al. (2000), investigate whether the nave investors hypothesis holds. Following the methodolog y introduced by Hand (1990) and Walther (1997), they found that for smaller firms, which are more likely to be followed by cultivate investors, the relation between accruals and negative future returns is weaker compared to larger firms, which are followed by many analysts. Therefore, the researchers suggest that, if anything, the nave investors hypothesis does not hold. In separate to other market anomalies where findings suggest that the nave investors hypothesis holds, the accruals anomaly is suggested as unique.Shi and Zhang (2007) investigate the earnings fixation hypothesis suggesting that the accruals anomaly is based on the investors fixation or obsession on earnings. Their primal hypothesis is that if investors are highly based on the reports about earnings and misprice the value-relevant earnings, then the returns should be dependent not only on the accruals but also on how the stocks price changes according to reported earnings.The researchers hypothesis is corroborate and finding support that an accrual strategy for firms whose stocks price highly fluctuates according to earnings yields a 37% annual return. Sawicki and Shrestha (2009) aim to examine two possible explanations for the accruals anomaly. Sloan (1996) proposed the fixation system under which investors fixate on earnings and thus overvalue or undervalue information for accruals.Kothari et al. (2006) proposed the agency theory of overvalued equity according to which managers of overvalued firms try to prolong the period of this overvaluation which causes accruals to increase.The paper uses the insider trading and other firm characteristics and tries to compare and contrast the two major explanations. Evidence produces bd Sawicki and Shrestha (2009) support the Kothari et al. (2006) explanation for the accrual anomaly. In a relatively different in motif paper, Wu and Zhang (2008) examine the role that the discount rates play in the accrual anomaly.They argue that if anything, the ano maly is not caused by irrationality from the investorsside but by the rationality of firms as it is proposed by the q-theory of investment. They argue that since the discount rates fall and more projects become profitable (which makes accruals to increase) future stock returns should decline. In other words, if the capital investment correctly adjusts to the current discount rates, the accruals should be negatively correlative with the future returns and positively correlated with the current returns. The evidence of Wu and Zhang (2008) support that the accruals are negatively correlated with the future stock returns but the contribution of the paper is in that they document that current stock returns are positively correlated with the accruals.2.3.4. The relation of the accrual anomaly with other market imperfections.Many papers examine the relation between the accruals anomaly and other well-known anomalies such as the post announcement drift or the value-growth phenomenon. Desai et al. (2002), suggest that the value-growth anomaly and the accruals anomaly basically interact and conclude that the accruals strategy and the C/P reflect the same underlying phenomena. Collins and Hribar (2000) suggest that there in no nexus between the accruals anomaly and the PAD, while Fairfield et al. (2001) support that the accruals anomaly is a sub-category of an anomaly caused by the mistaken interpretation of the information about growth by the investors.Cheng and Thomas (2006) examine the claim that the accrual anomaly is a part of a broader anomaly (and more specifically, the value-glamour anomaly). Prior literature suggested that the operating cash flows to price ratio subordinates accruals in explaining future stock returns (Deshai et al (2004)). Their evidence suggests that the Operating CF to price ratio does not include neither abnormal nor total accruals in future announcement returns. This particular result does not confirm the claim that the accrual anomaly is a part of a broad value-glamour anomaly.Atwood and Xie (2005) focus on the relation of the accrual anomaly and the mispricing of the special items first documented by Burgstahler, Jiambalvo and Shevlin (2002). Their hypothesis that the two phenomena are highly related is confirmed since the researchers found that special items and accruals are positively correlated. Additionally, further tests yielded results that suggest that the two imperfections are not distinct, while the special items have an impact on how the market misprices the accruals.Louis and Sun (2008) aim to assess the relation between the abnormal accrual anomaly and the post earnings announcement drift anomaly. The authors hypothesize that both anomalies are related to the management of the earnings and thus, they aim to find whether the two are nigh connected. The findings are consistent with the primal hypothesis, as they found that firms with large positive change of earnings that were least likely to have man ipulated earning downwards did not suffer from PEAD, while the same result was yielded for firms that had large negative change of earnings that were least likely to have managed their earnings upwards.As supported by many researchers the value-growth anomaly and accruals anomaly might be close related or they might even be caused by the equivalent or even identical roots.Fama and French (1996) support that the book to market factor captures the risk of default, while Khan (2008) suggests that in a similar pattern firms with low accruals have a larger possibility to bankrupt. Therefore, many researchers try to connect the two phenomena or to answer whether a strategy based on the accruals can offer more than what the value growth strategy offers.Hardouvelis, Papanastopoulos, Thomakos and Wang (2009) connect the two anomalies by assessing the profitability of interacting portfolios based on the accruals and value-growth measures. Their findings support that positive returns are obta inable and magnified when a long position is held for a portfolio with low accruals while combined with stocks that are characterised as high market to book. The difference of a risked-based explanation or an imperfection of the markets is considered to be a major debate, as it can challenge the market efficiency hypothesis.Many researchers, such as Fama and French (1996) noted that any potential profitable strategy is simply due to the higher risk that the investors have to bear by holding such portfolios. In a similar way, the profitable accruals strategies are considered as a compensation for a higher risk. Stocks that yield larger returns are compared or labelled as stocks of firms that are close to a financial distress. Khan (2000) aims to confirm or reject the risk-based explanation of the accruals anomaly.The researcher uses the ICAPM in order to test if the risk captured by the model can explain the anomaly first documented by Sloan (1996). It is worth noting that the descri ptive statistics results for the sample used showed that firms that had low accruals also had high bankruptcy risk.The contribution of the paper is that, by proposing a four factor model enhanced by recent asset pricing advances, it showed that a great portion of the mispricing that results in the accrual anomaly can be explained within a risk-based framework. Furthermore, Jeffrey Ng (2005) examines the risk based explanation for the accrual anomaly which proposes that accruals include information for financial distress.As proposed by many papers, the accrual anomaly is simply based on the fact that investors bare more risk and thus low accrual firms have positive abnormal returns. The researcher tries to examine how and if the abnormal returns of a portfolio which is short on low accruals stocks and long on high accrual firms changes when imperious for distress risk. Evidence supports that at least a part of the abnormal returns are a compensation for bearing additional risk. Fina lly, the results support that the self-aggrandizing portion of the high abnormal returns of the accrual strategy used in the particular paper is due to stocks that have high distress risk.2.3.5. The accruals anomaly and its relation with firms characteristics.A noteworthy part of the academic literature examines the existence of some key characteristics or drivers that are highly correlated with the accruals anomaly. Many researchers have published papers that aim to identify the impact of firm characteristics such as the size of the firm, characteristics that belong to the broader environment of the firms such as the accounting standards or the power of the minority shareholders. Zhang (2007) investigates whether the accrual anomaly varies cross-sectionally while being related with firms specific characteristics. The researcher primarily aims to explain which the main reason for the accrual anomaly is.As Zhang (2007) mentions, Sloan (1996) attributes the accrual anomaly to the ove rappraisal of the persistence of accruals by investors, while Fairfield (2003) argues that the accrual anomaly is a special case of a wider anomaly based on growth. The evidence supports the researchers hypothesis that characteristics such as the covariance of the employee growth with the accruals have an impact on the future stock returns. Finally, Zhang (2007) documents that that accruals co-vary with investment in unflinching assets and external financing.Louis, Robinson and Sbaraglia (2006) examine whether the non-disclosure of accruals information can have an impact on the accruals anomaly. The researchers, dividing their sample into firms that break dance accruals information on the earnings announcement and firms that do not, investigate whether there exists accruals mispricing. The evidence supports that for firms that disclose accruals information, the market manages to correctly understand the discretionary part of the change of the earnings.On the contrary, firms that d o not disclose accruals information are found to experience a correction on their stock price. Chambers and Paynes (2008) primal aim is to examine the relation of the accrual anomaly and the auditing quality. The researchers hypothesis is that the accruals mispricing is related with the quality of auditing.Additionally, their findings support that the stock prices do not reflect the accruals persistence characterising the lower-quality audit firms. Finally, their empirical work finds that the returns are greater for the lower-quality audit portfolio of firms.Palmon, Sudit and Yezegel (2008) examine the relation of the accruals mispricing and the company size. Evidence shows that company size affects the returns and, as the researchers documented, the negative abnormal returns are broadly due to larger firms while the positive abnormal returns come from the relatively small firms. Particularly, as the strategy with the highest profits they found the one that had a short position in the largest-top-accrual decile and a long position in the smallest-low-accrual decile.Bjojraj, Sengupta and Zhang (2009) examine the introduction of the Sarbanes-Oxley Act and the FAS 146 and how these two changes affected the accrual anomaly. FAS 146 (liabilities are recognized only when they are incurred) reduced the companys ability to manipulate earnings while the SOX aims to enhance the credibility of the financial statements. The evidence recognises a change on how the market conceives information about restructurings charges. The authors propose that a possible explanation is that before the introduction of SOX and the FAS 146, the market was unwilling due to the ability of the firms to manage earnings. Finally, Bjojraj, Sengupta and Zhang (2009) document that post to the FAS 146 and the SOX act, low accrual portfolios do not generate positive abnormal returns.2.4. The applications of the accruals phenomenon and reasons why it is not arbitraged away.The importance of the ana lysis of the anomalies is substantial for two reasons. Firstly, the profitability of a gratuitous strategy challenges the EMH, especially if the strategy is based on bearing no additional risk. Secondly, managers incentives to manipulate the financial statements and consequently the accruals would be obvious if a profitable strategy based on such widely available information existed. Chen and Cheng (2002) find that the managers incentive to memorialise abnormal accruals is highly correlated with the accrual anomaly. The hypothesis of the researchers, which their findings support, was that the investors fail to detect when the managers aim to record abnormal accruals and that may contribute to the accruals anomaly.Richardsons (2000) main objective is to examine whether the information contained in the accruals is utilized by short sellers. As the researcher mentions, previous articles such as that of Teoh and Wong (1999) found that sell side analysts were inefficient to correctly exploit the information contained in accruals for future returns. Richardson suggests that short sellers are considered as sophisticated enough to utilize the accruals information. Findings confirm previous work, such as that of Sloan (2000), who suggests that even short sellers do not correctly utilize the information contained into accruals.Ali, Chen, Yao and Yu (2007) examine whether and how equity funds benefit from the accrual anomaly by taking long position into low accruals firms. The researchers aim to identify how exposed are the equity firms to such a well known anomaly and what characteristics these funds share. By constructing a measure called accruals investing measure (AIM), they try to document the portion of the low accruals firms into the actively managed funds. The evidence shows that broadly funds are not widely exposed to low accruals firms but when they do so, they have an average of 2.83% annual return. It is worth noting that the annual return is net of trans action costs.Finally, the side-effects of high volatility in returns and in fund flows of the equity funds that are partially based on the accrual anomaly might be the reason behind the reluctance of the managers. Soares and Stark (2009) used UK firms to test whether a profitable accrual strategy is feasible net of transactions costs. Their findings support that indeed the accrual anomaly is present in the UK market. The authors suggest that for such a strategy to be profitable, individual is required to trade on firms with small market capitalization. They also suggest that although the accruals mispricing seems to exist also in the UK, the transaction costs limit the profits to such an extent that the accrual anomaly could be difficult characterised as a challenge to the semi strong form of the efficient market hypothesis.Finally, we should not neglect to mention two papers that discourse on why the markets do not simply correct the accruals anomaly. According to the unmingled t heory, markets are so imperfect that can produce the incentive to the market to correct the anomalies at any point of time. Mashruwala, Rajgopal and Shevlin (2006) examined the transactions costs and the idiosyncratic risk as possible reasons of why the accrual anomaly is not arbitraged away. The researchers aimed to investigate why the market does not correct the anomaly, but also to identify whether the low accruals firms are riskier. The paper poses the question of what stops the certified investors from taking long positions into profitable stocks according to the accrual anomaly so that they can arbitrage it away. The paper examines the practical difficulty of finding substitutes so that the risk can be minimized and its relation with the accrual anomaly. Additionally, the paper investigates the transaction costs and findings support that according to the accrual anomaly, the profitable stocks tend to be the ones with low stock prices and low trading volume.Lev and Nissim (200 4) focus on the persistence of the accr