Abstract

http://ssrn.com/abstract=893920
 
 

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The Accrual Anomaly: Risk or Mispricing?


David A. Hirshleifer


University of California, Irvine - Paul Merage School of Business

Kewei Hou


Ohio State University (OSU) - Department of Finance

Siew Hong Teoh


University of California - Paul Merage School of Business

February 2010

AFA 2007 Chicago Meetings Paper

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 (1993). 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.

Number of Pages in PDF File: 51

Keywords: Capital markets, accruals, market efficiency, behavioral accounting, behavioral finance, limited attention

JEL Classification: M41, M43, G12, G14

working papers series


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Date posted: March 30, 2006 ; Last revised: March 31, 2010

Suggested Citation

Hirshleifer, David A. and Hou, Kewei and Teoh, Siew Hong, The Accrual Anomaly: Risk or Mispricing? (February 2010). AFA 2007 Chicago Meetings Paper. Available at SSRN: http://ssrn.com/abstract=893920 or http://dx.doi.org/10.2139/ssrn.893920

Contact Information

David A. Hirshleifer (Contact Author)
University of California, Irvine - Paul Merage School of Business ( email )
Irvine, CA California 92697-3125
United States
Kewei Hou
Ohio State University (OSU) - Department of Finance ( email )
2100 Neil Avenue
Columbus, OH 43210-1144
United States
614-292-0552 (Phone)
614-292-2418 (Fax)

Siew Hong Teoh
University of California - Paul Merage School of Business ( email )
Irvine, CA California 92697-3125
United States
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