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The Accrual Anomaly: Risk or Mispricing?

Author

Listed:
  • David Hirshleifer

    (Merage School of Business, University of California, Irvine, Irvine, California 92697)

  • Kewei Hou

    (Fisher College of Business, Ohio State University, Columbus, Ohio 43210)

  • Siew Hong Teoh

    (Merage School of Business, University of California, Irvine, Irvine, California 92697)

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 0.16, higher than that of the market factor or the SMB and HML factors of Fama and French. According to rational frictionless asset pricing models, the ability of accruals to predict returns should come from the loadings on this accrual factor-mimicking portfolio. However, our tests indicate that it is the accrual characteristic rather than the accrual factor loading that predicts returns. These findings suggest that investors misvalue the accrual characteristic and cast doubt on the rational risk explanation. This paper was accepted by Brad Barber, Teck Ho, and Terrance Odean, special issue editors.

Suggested Citation

  • David Hirshleifer & Kewei Hou & Siew Hong Teoh, 2012. "The Accrual Anomaly: Risk or Mispricing?," Management Science, INFORMS, vol. 58(2), pages 320-335, February.
    • Handle: RePEc:inm:ormnsc:v:58:y:2012:i:2:p:320-335
    DOI: 10.1287/mnsc.1100.1289
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    as
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    More about this item

    Keywords

    capital markets; accruals; market efficiency; behavioral finance; limited attention;
    All these keywords.

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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