A Simple Model that Helps Explaining the Accruals Anomaly
53 Pages Posted: 4 Feb 2015 Last revised: 11 May 2018
Date Written: December 27, 2017
We propose a new multifactor model to price the cross-section of average excess returns associated with accruals portfolios, and hence explain the accruals anomaly. Our model represents an application of the Intertemporal CAPM from Merton (1973), where the key factors are the innovations on the term spread and value spread. The model clearly outperforms the simple CAPM, and shows large explanatory power for the cross-sectional risk premia associated with three different groups of accrual portfolios. Moreover, the model compares favorably with alternative multifactor models widely used in the literature. Our results remain robust by using equal-weighted accruals portfolios.
Keywords: Accruals anomaly; Asset pricing; Cross-section of stock returns; Term spread; Value spread; Intertemporal CAPM; Linear multifactor models; Predictability of stock returns; Fama-French factors; Investment and profitability factors
JEL Classification: G11, G12, M41
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