The Mispricing of Abnormal Accruals

Xie, Hong

doi:10.2308/accr.2001.76.3.357

Cited by 982 publications

(768 citation statements)

References 17 publications

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“…finds that across different industries or sets of firms, accruals persistence is unrelated to the strength of the accrual anomaly. 2,3 Some authors explicitly contend that the accrual anomaly represents in whole or part a rational risk premium, either for distress risk (Ng (2004)) or for the risks associated with the aggregate cash flow news factor and the discount rate news factor of Campbell and 1 See, e.g., Sloan (1996), Teoh, Welch and Wong (1998a,b), Collins and Hribar (2000), Xie (2001), Thomas and Zhang (2002), Mushruwala, Rajgopal and Shevlin (2004), and Hirshleifer et al (2004). 2 Zhang also finds that accruals covary strongly with firm growth attributes, which could be potentially consistent with either a behavioral or rational risk premium explanation.…”

Section: Introductionmentioning

confidence: 99%

The Accrual Anomaly: Risk or Mispricing?

2012

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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 0.15, higher than that of the market factor or the HML factor of Fama and French (1993). In time series regressions, a model that includes the Fama-French factors and the additional accrual factor captures the accrual anomaly in average returns. However, further time series and cross-sectional tests indicate that it is the accrual characteristic rather than the accrual factor loading that predicts returns. These findings favor a behavioral explanation for the accrual anomaly.Keywords: Capital markets, accruals, market efficiency, behavioral accounting, behavioral finance, limited attention JEL Classification: M41, M43, G12, G14We thank Nai-Fu Chen, Kent Daniel, Bruce Johnson, Mort Pincus, Sheridan Titman, Yinglei Zhang, and workshop participants at Georgetown University, University of California-Berkeley, University of California-Irvine, and University of Iowa for very helpful comments. IntroductionOver the last decade, a large body of research has explored the accrual anomaly-the finding that firms with high operating accruals earn lower average returns than firms with low operating accruals, both in the U.S. (Sloan 1996) and in several other countries (Pincus, Rajgopal, and Venkatachalam (2005)). A conventional explanation for this effect is that the higher average returns for low accrual firms are compensation for higher systematic risk. In the multi-factor asset pricing models such as those of Merton (1973) and Ross (1976), security expected returns are increasing with the loadings ("betas") on multiple factors (not just the market, as in the CAPM). To explain the accrual anomaly in such models would require that the level of a firm's accruals be associated with the covariances of its returns with one or more aggregate risk factors. Specifically, low accrual firms would need to have sufficiently high loadings on priced systematic factors to justify their higher returns.An alternative explanation for the accrual anomaly is that the stock market is inefficient, and that investors naively fail to distinguish between the different forecasting power of the accruals and cash flow components of earnings for future earnings. In consequence, they are too optimistic about firms with high accruals and too pessimistic about firms with low accruals, implying irrationally high prices for high accrual firms and low prices for low accrual firms. High accrual firms therefore earn low abnormal returns and low accrual firms earn high abnormal returns.The accrual anomaly raises two important questions. First, is there common variation in stock returns related to accruals? In other words, do prices of high and low accrual firms comove, so that there is systematic risk associated with accruals? In a rational 2 frictionless market, such comovement is a necessary condition for the accrual anomaly to derive from risk. We find that an accrual factor-mimickin...

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Section: Introductionmentioning

confidence: 99%

The Accrual Anomaly: Risk or Mispricing?

2012

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“…In particular, there have been continuous discussions over the existence and causes of market anomaly where future stock returns might be predicted through variables related with finance and accounting information, such as unexpected earnings, accruals, and growth rate of long term operating assets Thomas 1989, 1990;Sloan 1996;Xie 2001;Fairfield, Whisenant, and Yohn 2003). Lev and Nissim (2004) expanded prior studies and reported that the investors failed to reflect BTD properly to predict future returns for the U.S. firms.…”

Section: ⅰ Introductionmentioning

confidence: 99%

“…In addition, we control for the market anomaly variable, which can directly affect future stock returns, unexpected earnings (SUE), accruals (ACC), the growth rate of long-term operating assets (GRLTNOA), and change of sales (CHSAL) (e.g., Thomas 1989, 1990;Fairfield, Whisenant, and Yohn 2003;Xie 2001). Finally, we include year dummies and industry dummies to control the influence of year by year effect and industry specific effect.…”

Section: Aver(vtmentioning

confidence: 99%

A Comparison of Investors’ and Analysts’ Biases in Interpreting Book-Tax Difference: Evidence from Korean Stock Market

Chun¹,

Shim²

2017

Glob Bus Financ Rev

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A B S T R A C TThis study examines and compares investors' and analysts' biases in interpreting book-tax difference (hereafter BTD). The empirical results of using 1,544 Korean firm-year observations from 2001 to 2008 are as follows. First, we find that BTD is negatively associated with the value-price (V/P) ratio. This result implies that investors have more optimistic biases than analysts do in interpreting BTD. Second, for high institutional ownership sample, the negative association between BTD and V/P ratio would disappear. This empirical result suggests that sophisticated institutional investors understand the meaning of BTD better than general investors. Third, for lower analyst following sample, there was no significant association between BTD and V/P ratios. This implies that higher analyst following reduces biases in analysts' earnings forecasts. This study adds to the growing body of evidence that is related to the efficiency of analysts' earnings forecasts. It is the first empirical study to show that investors do not fully incorporate the meaning of BTD into their stock pricing compared with analysts' earnings forecasts.

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“…For net income, we use the definitions by Subramanyam (1996) and Xie (2001), which is the sum of accruals and cash flow from operations.…”

Section: Comparison Explanatory Power Of Earnings Componentsmentioning

confidence: 99%

“…Accordingly, investigating earning components under the accrual concept provides a means of understanding the executive's perspective of future earnings. Xie (2001) examine whether stock market rationally reflects these implications of accruals on enterprise's one-year-ahead earnings performance. Xie's study shows that the market overestimates the persistence of accrual components and overprices those stocks associated with abnormal accruals.…”

Section: Introductionmentioning

confidence: 99%

Is Earnings Information Superior to Net Income as a Measure of Future Earnings? A Study on Accruals and Real Earnings Management

Lee¹,

Lu²

2014

International Journal of Financial Research

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This study examines the incremental information content of components of earnings by regressing future net income of earnings' components in a series of multivariate models. We find that the components of operating cash flow and accruals provide more information to effectively predict future profitability, particularly when we dismantles financial measurements into various combinations of operating cash flow and accrual-based components. However, the components of real earnings management provide less information of future profitability. We observe that the more informative the information content of earnings is, the more precise the prediction of future profitability can be.

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The Mispricing of Abnormal Accruals

Cited by 982 publications

References 17 publications

The Accrual Anomaly: Risk or Mispricing?

The Accrual Anomaly: Risk or Mispricing?

A Comparison of Investors’ and Analysts’ Biases in Interpreting Book-Tax Difference: Evidence from Korean Stock Market

Is Earnings Information Superior to Net Income as a Measure of Future Earnings? A Study on Accruals and Real Earnings Management

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