Abstract

http://ssrn.com/abstract=995509
 
 

References (86)



 


 



What Can We Conclude from Common Tests of Accrual Mispricing?


Mozaffar Khan


Harvard Business School; University of Minnesota - Twin Cities - Carlson School of Management

February 14, 2008


Abstract:     
Mispricing and risk have both been suggested as explanations for the cross-sectional relation between stock returns and firm characteristics such as accruals. As emphasized by Ferson and Harvey (1998) and Berk, Green and Naik (1999), it is difficult to evaluate these competing explanations without explicitly modelling the relation between risk and firm characteristics, if risk is not independent of firm characteristics. Drawing on theory and empirical evidence, this paper models systematic risk as a function of accruals, and accruals as mean-reverting. When the true abnormal returns are zero, but the true betas are unobserved by the researcher, the model predicts the anomalous pattern of empirical results previously reported in the accrual anomaly literature and attributed to mispricing: (i) CAPM abnormal returns to an accrual hedge portfolio are positive on average; (ii) the abnormal returns are positive in almost all years; (iii) abnormal returns decay as the holding period is extended beyond one year; (iv) the Mishkin (1983) test of market efficiency is rejected. Using simulations, the paper shows that small and plausible degrees of risk mismeasurement also reproduce the magnitudes of the anomalous results previously reported in the literature.

Number of Pages in PDF File: 46

Keywords: Accruals, Risk, Return, Mispricing, Investment, Anomalies, Market Efficiency

JEL Classification: G12, G14, M41, M43, M49

working papers series





Download This Paper

Date posted: June 21, 2007 ; Last revised: December 22, 2011

Suggested Citation

Khan, Mozaffar, What Can We Conclude from Common Tests of Accrual Mispricing? (February 14, 2008). Available at SSRN: http://ssrn.com/abstract=995509 or http://dx.doi.org/10.2139/ssrn.995509

Contact Information

Mozaffar Khan (Contact Author)
Harvard Business School ( email )
Soldiers Field Road
Morgan 362
Boston, MA 02163
United States
University of Minnesota - Twin Cities - Carlson School of Management ( email )
19th Avenue South
Minneapolis, MN 55455
United States
Feedback to SSRN


Paper statistics
Abstract Views: 5,830
Downloads: 448
Download Rank: 35,656
References:  86

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo4 in 0.422 seconds