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The Accrual Anomaly: Risk or Mispricing?

  • Hirshleifer, David

    (Ohio State U)

  • Hou, Kewei

    (Ohio State U)

  • Teoh, Siew Hong

    (Ohio State U)

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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File URL: http://www.cob.ohio-state.edu/fin/dice/papers/2006/2006-3.pdf
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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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