Percent Accruals

48 Pages Posted: 24 Feb 2010

See all articles by Nader Hafzalla

Nader Hafzalla

affiliation not provided to SSRN

Russell J. Lundholm

University of British Columbia - Sauder School of Business

E. Matthew Van Winkle

Voyant Advisors

Date Written: February 24, 2010


We document how the effectiveness of an accruals-based trading strategy changes with the benchmark used to identify an extreme accrual. We measure “percent accruals” as accruals scaled by earnings, rather than total assets, and show that this seemingly small change produces a radically different sort of the data. We find that a trading strategy based on percent accruals yields significantly larger annual hedge returns than the traditional accruals measure, and does so mostly by improving the long position in low accrual stocks. The hedge returns are also significant in all but the lowest quintile of arbitrage risk. We show that percent accruals more effectively select firms where the difference between sophisticated and naïve forecasts are the most extreme. As such, our results are consistent with the earnings fixation hypothesis and are inconsistent with some alternative explanations for the accrual anomaly. We also find that percent accruals are not dependent on the presence or absence of special items and identify misvalued stocks just as well for loss firms as for gain firms, in contrast to the traditional accruals measure.

Keywords: Accruals, Market Efficiency, Excess Returns

JEL Classification: M41, M43, G12

Suggested Citation

Hafzalla, Nader and Lundholm, Russell J. and Van Winkle, E. Matthew, Percent Accruals (February 24, 2010). Available at SSRN: or

Nader Hafzalla

affiliation not provided to SSRN ( email )

Russell J. Lundholm (Contact Author)

University of British Columbia - Sauder School of Business ( email )

2053 Main Hall
Vancouver, British Columbia V6T 1Z2

E. Matthew Van Winkle

Voyant Advisors ( email )

San Diego, CA 92130
United States

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