Risk vs. Anomaly: A New Methodology Applied to Accruals

Posted: 24 May 2014 Last revised: 19 Nov 2014

See all articles by James A. Ohlson

James A. Ohlson

Hong Kong Polytechnic University - School of Accounting and Finance

Pawel Bilinski

City University London - Sir John Cass Business School

Date Written: January 18, 2012

Abstract

Research suggesting the existence of the accrual anomaly runs into the issue that risk serves as a competing explanation for abnormal returns. This paper proposes a novel approach to distinguish between risk and anomaly explanations for the negative association between accruals and returns. The intuition is that high risk stocks should experience relatively high and low returns more often than low risk stocks. Thus, a variable that has the opposite correlations with high returns than with low returns is unlikely to capture risk, which points toward an anomaly. The paper implements this perspective via two logistic regressions predicting relatively high and low returns. Controlling for standard risk measures, we document that low accruals increase the probability of large positive returns, but reduce the likelihood of large negative returns. This finding is inconsistent with the prediction that accruals reflect risk and supports the hypothesis that the accrual “anomaly” is indeed an anomaly.

Keywords: the accrual anomaly, risk and anomaly explanations, new research method

JEL Classification: M40, M41, G12, G14

Suggested Citation

Ohlson, James A. and Bilinski, Pawel, Risk vs. Anomaly: A New Methodology Applied to Accruals (January 18, 2012). Accounting Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2441058 or http://dx.doi.org/10.2139/ssrn.2441058

James A. Ohlson

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

M715, Li Ka Shing Tower
Hung Hom, Kowloon
China

Pawel Bilinski (Contact Author)

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

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