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The Accrual Anomaly: Risk or Mispricing?

51 Pages Posted: 30 Mar 2006 Last revised: 31 Mar 2010

David A. Hirshleifer

University of California, Irvine - Paul Merage School of Business; NBER

Kewei Hou

Ohio State University (OSU) - Department of Finance

Siew Hong Teoh

University of California, Irvine - Accounting Area

Date Written: February 2010

Abstract

We document considerable return comovement associated with accruals after controlling for other common factors. An accrual-based factor-mimicking portfolio has a Sharpe ratio of 0.16, higher than that of the market factor or the SMB and HML factors of Fama and French (1993). According to rational frictionless asset pricing models, the ability of accruals to predict returns should come from the loadings on this accrual factor-mimicking portfolio. However, our tests indicate that it is the accrual characteristic rather than the accrual factor loading that predicts returns. These findings suggest that investors misvalue the accrual characteristic, and cast doubt on the rational risk explanation.

Keywords: Capital markets, accruals, market efficiency, behavioral accounting, behavioral finance, limited attention

JEL Classification: M41, M43, G12, G14

Suggested Citation

Hirshleifer, David A. and Hou, Kewei and Teoh, Siew Hong, The Accrual Anomaly: Risk or Mispricing? (February 2010). AFA 2007 Chicago Meetings Paper. Available at SSRN: https://ssrn.com/abstract=893920 or http://dx.doi.org/10.2139/ssrn.893920

David A. Hirshleifer (Contact Author)

University of California, Irvine - Paul Merage School of Business ( email )

Irvine, CA California 92697-3125
United States

HOME PAGE: http://sites.uci.edu/dhirshle/

NBER ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Kewei Hou

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States
614-292-0552 (Phone)
614-292-2418 (Fax)

Siew Hong Teoh

University of California, Irvine - Accounting Area ( email )

Irvine, CA 92697-3125
United States

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