A Tale of Two Strategies:

This study documents a subtle and counter-intuitive interaction between operating cash flow (CFO) and accruals, and their association with future stock returns. While the two strategies should by construction capture similar anomalies, we find evidence in two large stock markets that they appear distinct, and that returns to these strategies are strongly negatively correlated. We show that the presence and behaviour of financially distressed firms influences asymmetrically the performance of accruals and CFO strategies. Given their highly speculative nature, we find investor sentiment to be an important determinant of the performance of financially distressed firms. Because accruals and CFO based strategies load asymmetrically on financially distressed securities, strategies based on accruals (cash flow) perform particularly well (poorly) during high sentiment periods and particularly poorly (well) during low sentiment periods. JEL classification: G12, G14, M41