Two Accrual Anomalies: A Dichotomy of Accrual-Return Relations
Florida International University (FIU) - Department of Finance
University of Hong Kong - School of Economics and Finance; Peking University - Guang Hua School of Management
ING Aeltus Asset Management
February 15, 2009
Motivated by the findings that the aggregate (discretionary) accruals positively predicts one-year-ahead firm-level stock returns and that there is a considerable amount of co-movement in firm-level (discretionary) accruals, we decompose firm-level (discretionary) accruals into a market-wide component and a firm-specific component. We document robust evidence that the two orthogonal (discretionary) accrual components affect stock returns in qualitatively opposite ways - while the firm-specific component negatively predicts next-period stock returns, firms with a higher level of market-wide component have on average higher next-period stock returns. Moreover, the two accrual-return relations co-exist and the accrual anomaly due to the firm-specific component of (discretionary) accruals largely supersedes the conventional accrual anomaly documented in Sloan (1996) and Xie (2001). Furthermore, a hedge strategy explicitly exploiting the two accrual anomalies yields a significantly higher return than that of a typical accrual strategy built only on firm-level (discretionary) accruals. Our analysis shows that accounting information such as (discretionary) accruals affects the stock market through both market-wide and firm-specific channels. We briefly discuss potential economic rationales behind each of the two accrual anomalies.
Number of Pages in PDF File: 46
Keywords: Accrual anomalies, market-wide and firm-specific components of (discretionary) accruals, asset pricing, hedge strategy
JEL Classification: G1, G3, M4working papers series
Date posted: February 16, 2009 ; Last revised: March 26, 2010
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