The Rise of Accruals Seasonality Spread

Abstract

The seasonal ebbs and flows of balance sheets create seasonal accruals. We document that firms with historically larger accruals in a given quarter of the year earn lower stock returns when those accruals are expected to be announced. The accruals seasonality spread is significant only in the post-2001 period when there are increased accruals-based arbitrage activities. Our findings indicate that, although investors have become quick to respond to accruals information, they have not fully integrated accruals seasonality in their prior beliefs. Our results can be reconciled by rational inattention models, in which disclosure processing costs force investors to allocate scarce resources across disclosures.

Keywords: Seasonality; Accruals anomaly; Market efficiency; Unsophisticated arbitrage; Mispricing; Disclosure processing costs

JEL Classification: G10, G12, G14, M41