The Long and Short of the Accrual Anomaly

52 Pages Posted: 31 Jul 2006

See all articles by Messod D. Beneish

Messod D. Beneish

Indiana University - Kelley School of Business - Department of Accounting

Craig Nichols

Syracuse University

Date Written: June 2006


The paper provides evidence that the relation between accruals and future returns is not symmetric. We find that firms with low accruals generate insignificant abnormal returns in asset pricing regressions that control for either earnings quality or operating volatility. In contrast, we find that accrual hedge returns are driven by firms with large positive accruals and firms with high probabilities of earnings overstatement. This asymmetry is consistent with our view that upwards rather than downwards earnings management is an important contributor to accrual mispricing. We also find that firms with high accruals are smaller and have higher arbitrage risk (residual return volatility), suggesting that short sellers are unlikely to arbitrage away these negative abnormal returns. We conclude that an omitted risk factor explains results for low accruals and that transaction costs/limits to arbitrage explain the persistence of mispricing for high accruals.

Keywords: Accrual Mispricing, Asymmetry, Risk, Earnings Management, Asset pricing

JEL Classification: G12, G14, M41, M43, G11

Suggested Citation

Beneish, Messod Daniel and Nichols, Craig, The Long and Short of the Accrual Anomaly (June 2006). Available at SSRN: or

Messod Daniel Beneish (Contact Author)

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States
812-855-2628 (Phone)
812-855-4985 (Fax)

Craig Nichols

Syracuse University ( email )

900 S. Crouse Avenue
Syracuse, NY 13244-2130
United States

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