Inside the 'Accrual Anomaly'

45 Pages Posted: 23 Jul 2003

See all articles by Tzachi Zach

Tzachi Zach

Ohio State University (OSU) - Department of Accounting & Management Information Systems

Date Written: June 2003

Abstract

Sloan (1996) and a number of subsequent studies present evidence that a trading strategy based on publicly available accounting accruals earns abnormal returns of approximately 10% in the year following its initiation. This empirical regularity has been named the 'accrual anomaly'.

In this paper I investigate the accrual anomaly along two dimensions. First, I evaluate whether the accrual anomaly is related to other anomalies documented in the finance literature. Second, I investigate whether different methods for calculating long-term abnormal returns have an effect on the returns to the accrual strategy.

My results indicate that both mergers and divestitures have an effect on the returns generated by the accrual strategy. After excluding observations associated with either mergers or divestitures, there is a decrease of about 25% in the strategy's returns. Second, different calculation methods for benchmark portfolio returns do not have a material effect on the returns of the accrual strategy. Third, when book-to-market is added to size as a second control for normal returns, returns to the accrual strategy decrease by approximately 20%. Fourth, the accrual strategy's returns are much larger in a sample of Nasdaq firms. Overall, I conclude that the accrual anomaly is sensitive to the series of tests conducted in this study, although a substantial portion of it remains unexplained.

Keywords: accruals, market efficiency, mispricing

JEL Classification: M41, M43, G12, G14

Suggested Citation

Zach, Tzachi, Inside the 'Accrual Anomaly' (June 2003). Available at SSRN: https://ssrn.com/abstract=417781 or http://dx.doi.org/10.2139/ssrn.417781

Tzachi Zach (Contact Author)

Ohio State University (OSU) - Department of Accounting & Management Information Systems ( email )

2100 Neil Avenue
Columbus, OH 43210
United States
614-292-4101 (Phone)

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