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The Accrual Anomaly: Risk or Mispricing?

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  • Hirshleifer, David

    (Ohio State U)

  • Hou, Kewei

    (Ohio State U)

  • Teoh, Siew Hong

    (Ohio State U)

Abstract

We document considerable return comovement associated with accruals after controlling for other common factors. An accrual-based factor-mimicking portfolio has a Sharpe ratio of 0.15, higher than that of the market factor or the HML factor of Fama and French (1993). In time series regressions, a model that includes the Fama-French factors and the additional accrual factor captures the accrual anomaly in average returns. However, further time series and cross-sectional tests indicate that it is the accrual characteristic rather than the accrual factor loading that predicts returns. These findings favor a behavioral explanation for the accrual anomaly.

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Paper provided by Ohio State University, Charles A. Dice Center for Research in Financial Economics in its series Working Paper Series with number 2006-3.

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Date of creation: Mar 2006
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Handle: RePEc:ecl:ohidic:2006-3

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Cited by:
  1. Mohanram, Partha & Rajgopal, Shiva, 2009. "Is PIN priced risk?," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 47(3), pages 226-243, June.
  2. Lect. Aurora Murgea Ph. D, 2010. "Classical Lassical And Behavioural Finance In Investor Decision," Annals of University of Craiova - Economic Sciences Series, University of Craiova, Faculty of Economics and Business Administration, University of Craiova, Faculty of Economics and Business Administration, vol. 2(38), pages 12, May.
  3. Xiaoji Lin & Lu Zhang, 2011. "Covariances versus Characteristics in General Equilibrium," NBER Working Papers 17285, National Bureau of Economic Research, Inc.
  4. Martijn Cremers & Ankur Pareek, 2009. "Institutional Investors’ Investment Durations and Stock Return Anomalies: Momentum, Reversal, Accruals, Share Issuance and R&D Increases," Yale School of Management Working Papers, Yale School of Management amz2662, Yale School of Management, revised 04 Sep 2009.
  5. Hirshleifer, David & Teoh, Siew Hong & Yu, Jeff Jiewei, 2009. "Short Arbitrage, Return Asymmetry And The Accrual Anomaly," MPRA Paper 16487, University Library of Munich, Germany.
  6. Hirshleifer, David & Teoh, Siew Hong & Yu, Jeff Jiewei, 2007. "Do short-sellers arbrtrage accrual-based return anomalies?," MPRA Paper 5510, University Library of Munich, Germany, revised 27 Oct 2007.
  7. Core, John E. & Guay, Wayne R. & Verdi, Rodrigo, 2008. "Is accruals quality a priced risk factor?," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 46(1), pages 2-22, September.
  8. Lin, Xiaoji & Zhang, Lu, 2013. "The investment manifesto," Journal of Monetary Economics, Elsevier, Elsevier, vol. 60(3), pages 351-366.
  9. Richardson, Scott & Tuna, Irem & Wysocki, Peter, 2010. "Accounting anomalies and fundamental analysis: A review of recent research advances," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 50(2-3), pages 410-454, December.

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