This study investigates the existence of Accrual anomaly in Karachi Stock Exchange (KSE) by using a sample of 340 non-financial firms listed at KSE. The objective of the study is to check the persistence of the Accruals and Cash Flow components, their respective effect on future stock prices and a hedge portfolio returns. Ordinary Least Squaretechnique is used to check the persistence of earnings and its components, while GeneralizedLeast Square is also used to examine the effect of earnings and its components on future stock returns.Decile portfolios are formed on the basis of magnitude of accruals for the calculation of hedge portfolio return.The continuity and durability in earnings turns out to be dependent on the accrual and cash flow components of earnings’ magnitudes. The efficient market hypothesis which states that all publicly available information is reflected in stock prices fails to hold. In addition, the failure of stock prices to comprehend the different properties of the constituents of earnings looks like investors inability to differentiate between the two components. The non-existence of market efficiency does not qualify that investors are irrational or the opportunitiesof earning profits are not exploited. But normal returns can be earned by opting for an active investment strategy which fully utilizes the analysis of financial statements.The study concludes that accrual anomaly exists in Karachi Stock Exchange (KSE). Supervisor: Dr. Attiya Yasmin Javid