Why is the Accrual Anomaly Not Arbitraged Away?

Mashruwala, Christina A.; Rajgopal, Shivaram; Shevlin, Terry J.

doi:10.2139/ssrn.506923

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Why is the Accrual Anomaly Not Arbitraged Away?

42 Pages Posted: 27 Feb 2004

See all articles by Christina A. Mashruwala

Shivaram Rajgopal

Columbia University - Columbia Business School, Accounting, Business Law & Taxation

Terry J. Shevlin

University of California-Irvine; University of California-Irvine

Abstract

Sloan (1996) and several follow up papers show that the stock market behaves as though it cannot understand the implications of accruals for future earnings. We propose and find evidence consistent with the hypothesis that risk-averse arbitrageurs are unable to eliminate accrual related mispricing because individual stocks in the extreme accrual deciles do not have close substitutes. Note that the textbook theory of arbitrage is predicated on the ability of the arbitrageur to find perfect substitutes for mispriced stocks. Our results suggest that arbitrage risk impedes arbitrageurs from eliminating accrual mispricing.

Keywords: Accrual anomaly, arbitrage risk

JEL Classification: G12, G14, M41, M43

Suggested Citation: Suggested Citation

Mashruwala, Christina A. and Rajgopal, Shivaram and Shevlin, Terry J. and Shevlin, Terry J., Why is the Accrual Anomaly Not Arbitraged Away?. Available at SSRN: https://ssrn.com/abstract=506923 or http://dx.doi.org/10.2139/ssrn.506923