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Investor Sophistication and the Mispricing of Accruals

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Listed:
  • Daniel W. Collins

    (University of Iowa)

  • Guojin Gong

    (University of Iowa)

  • Paul Hribar

    (Cornell University)

Abstract

This paper examines the role of institutional investors in the pricing of accruals. Using Bushee;s (1998) classification of institutional investors, we show that firms with a high level of institutional ownership and a minimum threshold level of active institutional traders have stock prices that more accurately reflect the persistence of accruals. This result holds after controlling for differences in the persistence of accruals between firms with high and low institutional ownership, and after controlling for other characteristics that are correlated with institutional ownership and future returns. Additionally, firms with low institutional ownership are smaller, less profitable, and have lower share turnover, suggesting that limits to arbitrage impede institutional investors from exploiting the seemingly large abnormal returns for these firms.

Suggested Citation

  • Daniel W. Collins & Guojin Gong & Paul Hribar, 2003. "Investor Sophistication and the Mispricing of Accruals," Review of Accounting Studies, Springer, vol. 8(2), pages 251-276, June.
    • Handle: RePEc:spr:reaccs:v:8:y:2003:i:2:d:10.1023_a:1024417513085
    DOI: 10.1023/A:1024417513085
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    References listed on IDEAS

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    1. Steven Balsam & Eli Bartov & Carol Marquardt, 2002. "Accruals Management, Investor Sophistication, and Equity Valuation: Evidence from 10–Q Filings," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 40(4), pages 987-1012, September.
    2. Bushee, BJ & Noe, CF, 2000. "Corporate disclosure practices, institutional investors, and stock return volatility," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 38, pages 171-202.
    3. Jegadeesh, Narasimhan & Titman, Sheridan, 1993. "Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency," Journal of Finance, American Finance Association, vol. 48(1), pages 65-91, March.
    4. Paul Hribar & Daniel W. Collins, 2002. "Errors in Estimating Accruals: Implications for Empirical Research," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 40(1), pages 105-134, March.
    5. Walther, BR, 1997. "Investor sophistication and market earnings expectations," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 35(2), pages 157-179.
    6. Mark T. Bradshaw & Scott A. Richardson & Richard G. Sloan, 2001. "Do Analysts and Auditors Use Information in Accruals?," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 39(1), pages 45-74, June.
    7. Collins, Daniel W. & Hribar, Paul, 2000. "Earnings-based and accrual-based market anomalies: one effect or two?," Journal of Accounting and Economics, Elsevier, vol. 29(1), pages 101-123, February.
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    Cited by:

    1. Yu Hou, 2015. "The role of diversification in the pricing of accruals quality," Review of Accounting Studies, Springer, vol. 20(3), pages 1059-1092, September.
    2. Linna Shi & Huai Zhang, 2012. "Can the earnings fixation hypothesis explain the accrual anomaly?," Review of Accounting Studies, Springer, vol. 17(1), pages 1-21, March.
    3. Shai Levi, 2008. "Voluntary disclosure of accruals in earnings press releases and the pricing of accruals," Review of Accounting Studies, Springer, vol. 13(1), pages 1-21, March.
    4. Michael S. Drake & Linda A. Myers, 2011. "Analysts’ accrual-related over-optimism: do analyst characteristics play a role?," Review of Accounting Studies, Springer, vol. 16(1), pages 59-88, March.
    5. Amberger, Harald & Stocken, Phillip C., 2025. "Management reputation for credible financial reporting," arqus Discussion Papers in Quantitative Tax Research 301, arqus - Arbeitskreis Quantitative Steuerlehre.

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