Do Mutual Funds Profit from the Accruals Anomaly?
University of Texas at Dallas - Naveen Jindal School of Management
Shanghai University of Finance and Economics
University of Iowa - Henry B. Tippie College of Business
University of Cincinnati
June 1, 2007
AFA 2007 Chicago Meetings
Journal of Accounting Research, Forthcoming
Using data on both fund stockholdings and fund returns, we show that actively-managed equity mutual funds are able to make significant excess returns net of actual transaction costs from trading on the accruals anomaly. We find that the top 10% of mutual funds that most actively follow the accruals strategy have Fama-French 3-factor alphas of 2.83% per year. We also find that mutual funds more active in using the accruals strategy exhibit higher return volatility and higher flow volatility. These factors may represent the adverse consequences of arbitrage risk that funds face when they trade on the accruals anomaly (Shleifer & Vishny 1997).
Number of Pages in PDF File: 41
Keywords: accruals anomaly, mutual fund, arbitrage risk
JEL Classification: G12,G20
Date posted: March 21, 2006 ; Last revised: February 3, 2008