For instance, the Spearman correlation coefficients show that long-term asset accruals have correlations of 0.249 with lagged free cash flow, -0.090 with lagged leverage, and -0.200 with lagged VP ratio. These correlations are all significant at the 0.01% level.
A lower VP ratio indicates a higher likelihood of equity valuation; in related tests, observations with a negative VP ratio are omitted.
For each year, I sort the whole sample into five portfolios based on levels of free cash flow, leverage, or VP ratio in the year prior to investment.
For example, in tests of Model 1, the coefficients on LTAA increase in magnitude from 0.010 in the lowest FCF group to -0.060 in the highest FCF group, decrease from -0.020 in the lowest leverage group to -0.001 in the highest leverage group, and decrease from -0.032 in the lowest VP ratio group to -0.025 in the highest VP ratio group (a low ratio indicates a high likelihood of overvaluation).