A Simple Model Relating Accruals to Risk, and its Implications for the Accrual Anomaly

25 Pages Posted: 3 Mar 2012

See all articles by Mozaffar Khan

Mozaffar Khan

Causeway Capital Management, LLC

Date Written: January/February 2012

Abstract

This paper models systematic risk as a function of mean‐reverting accruals. When the true abnormal returns are zero, but the true betas are empirically unobserved, the model predicts the anomalous pattern of empirical results on the accrual anomaly: (i) CAPM abnormal returns to an accrual hedge portfolio are positive on average, (ii) are positive in almost all years, (iii) decay as the holding period is extended beyond one year, and (iv) the Mishkin (1983) test of market efficiency is rejected. Using simulations, small and plausible degrees of risk mismeasurement also reproduce the magnitudes of prior results on the accrual anomaly.

Keywords: accrual anomaly, expected return models, mispricing, simulation

Suggested Citation

Khan, Mozaffar, A Simple Model Relating Accruals to Risk, and its Implications for the Accrual Anomaly (January/February 2012). Journal of Business Finance & Accounting, Vol. 39, Issue 1‐2, pp. 35-59, 2012, Available at SSRN: https://ssrn.com/abstract=2015151 or http://dx.doi.org/10.1111/j.1468-5957.2011.02275.x

Mozaffar Khan (Contact Author)

Causeway Capital Management, LLC

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