Do We Accept Accrual Profits at Our Peril?

Posted: 8 Aug 2006

See all articles by Qiao Liu

Qiao Liu

The University of Hong Kong - School of Economics and Finance; Peking University - Guanghua School of Management

Rong Qi

ING Aeltus Asset Management

Abstract

The study described documented evidence that informed traders use their proprietary information on accrual quality to trade against average investors. The informed traders' arbitrage strategy generated annualized abnormal returns adjusted by size and book-to-market value of 19.8 percent over the 1993-2002 period. The accrual profits were still significant after trading costs were subtracted. The findings suggest that (1) informed traders' profits from accruals-based strategies derive mainly from their costly information on accrual quality and (2) the persistence of the accrual anomaly may be driven by nondiversifiable information risk. The study suggests a strategy for uninformed traders to overcome the information barrier by mimicking informed traders.

Keywords: Portfolio Management, Equity Strategies, Equity Investments, Fundamental Analysis and Valuation Models, Financial Statement Analysis, Accounting and Financial Reporting Issues

Suggested Citation

Liu, Qiao and Qi, Rong, Do We Accept Accrual Profits at Our Peril?. Financial Analysts Journal, Vol. 62, No. 4, pp. 62-75, July/August 2006, Available at SSRN: https://ssrn.com/abstract=922304

Qiao Liu (Contact Author)

The University of Hong Kong - School of Economics and Finance ( email )

School of Economics and Finance
Pokfulam
Hong Kong
Hong Kong
852-2859-1059 (Phone)
852-2548-1152 (Fax)

Peking University - Guanghua School of Management ( email )

Peking University
Beijing, Beijing 100871
China

Rong Qi

ING Aeltus Asset Management ( email )

10 State House Square
Hartford, CT 06457
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Abstract Views
606
PlumX Metrics