The primary purpose of financial statements is to provide relevant and reliable information to a variety of end users, including shareholders, potential investors and equity analysts. In an efficient market, new information inherent in financial statements is impounded into prices quickly and in an unbiased manner. While pricing errors may occur in an efficient market, not only are they unlikely to be systematic, but competition between investors will ensure that any mispricing is short lived. Increasingly, however, financial economists are questioning whether market participants have the requisite cognitive ability to facilitate market efficiency. Hirshleifer, Hou, Teoh and Zhang (HHTZ) (2004, p.298) note that “information is vast and attention limited”. They conjecture that investors focus on selected financial statement line items, thereby forming their judgements from a subset of all available information. In such instances, investors may make systematic errors in processing information which manifest in stock prices. Sloan’s (1996) study of accruals is a prominent example of apparent investor mispricing of financial statement information. While the cashflow and accrual components of currentperiod earnings have different implications for future earnings, stock returns behave as if investors fixate on the aggregate earnings line item. This failure to adequately differentiate between the components of earnings suggests an obvious trading strategy based on companies’ relative levels of reported accruals. Indeed, the magnitude of profits documented by Sloan (1996) from trading the so-called accrual anomaly has had a profound impact on investment practice. Under the accrual-based approach to accounting, accruals arise as revenue and expenses are assigned to the accounting period in which they occur, irrespective of when the associated cashflow transpires. Accruals are made with an expectation that they will convert into cashflow in a timely manner, at which point the previous accrual is reversed. In the event that accruals do not generate the anticipated cashflow, then earnings were misstated in the period during which the accrual was raised. While, in theory, rational investors will monitor the conversion of accruals into cashflow and make appropriate inferences about the likely persistence of earnings, Sloan’s (1996) empirical findings suggest otherwise. Of particular relevance to the current paper, HHTZ (2004) study the relationship between net operating assets (NOA) and the cross-section of stock returns. In doing so, they build on two key aspects of the above discussion. First, NOA are defined as the inter-temporal accumulation of periodic differences between operating earnings and free cash flow. In effect, NOA are the ‘lifetime’ discrepancy between accounting value added and cash value added. If the decomposition of single-year earnings into cashflow and accrual components provides a signal of mispricing, then a multi-period counterpart like NOA is also likely to convey mispricing. Second, given that accruals are intended to be a temporary accounting treatment to accommodate the timing difference between a transaction and its resulting cashflow, NOA measures the extent to which past accruals have persistently not translated into realised cashflow. Consistent with these arguments, HHTZ (2004) document a strongly negative relationship between NOA and future returns on US stocks.