Why is the Accrual Anomaly Not Arbitraged Away?

42 Pages Posted: 27 Feb 2004

See all articles by Christina A. Mashruwala

Christina A. Mashruwala

University of Alberta

Shivaram Rajgopal

Columbia Business School

Terry J. Shevlin

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

Mashruwala, Christina A. and Rajgopal, Shivaram 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

Christina A. Mashruwala

University of Alberta ( email )

Edmonton, Alberta T6G 2R3
Canada

Shivaram Rajgopal (Contact Author)

Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

Terry J. Shevlin

University of California-Irvine ( email )

Irvine, CA California 92697-3125
United States
2065509891 (Phone)

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