Percent Accruals
48 Pages Posted: 24 Feb 2010
Date Written: February 24, 2010
Abstract
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: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Accrual Reliability, Earnings Persistence and Stock Prices
By Scott A. Richardson, Richard G. Sloan, ...
-
Accrued Earnings and Growth: Implications for Earnings Persistence and Market Mispricing
By Patricia M. Fairfield, Scott Whisenant, ...
-
Insider Trading, Earnings Quality, and Accrual Mispricing
By Mark E. Vargus and Messod D. Beneish
-
Inventory Changes and Future Returns
By Jacob K. Thomas and Huai Zhang
-
Why is the Accrual Anomaly Not Arbitraged Away?
By Christina A. Mashruwala, Shivaram Rajgopal, ...
-
Value-Glamour and Accruals Mispricing: One Anomaly or Two?
By Hemang Desai, Shivaram Rajgopal, ...
-
Accruals and Future Stock Returns: Tests of the Naive Investor Hypothesis
By Ashiq Ali, Lee-seok Hwang, ...
-
The Implications of Accounting Distortions and Growth for Accruals and Profitability
By Scott A. Richardson, Richard G. Sloan, ...
-
By Patricia Dechow and Weili Ge
-
By Patricia M. Fairfield, Scott Whisenant, ...