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The Accrual Anomaly: Risk or Mispricing?

Author

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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.

Suggested Citation

  • Hirshleifer, David & Hou, Kewei & Teoh, Siew Hong, 2006. "The Accrual Anomaly: Risk or Mispricing?," Working Paper Series 2006-3, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    • Handle: RePEc:ecl:ohidic:2006-3
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    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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