Going, Going, Gone? The Demise of the Accruals Anomaly

Abstract

Consistent with public statements made by sophisticated practitioners, we show that the hedge returns to Sloan's (1996) accruals anomaly have decayed in U.S. markets to the point that they are no longer positive. While we cannot unambiguously identify the causal factor or factors involved, our empirical analyses suggest that the anomaly's demise stems at least in part from a decline in the size of the mispricing signal (as measured by accruals in the extreme accruals deciles and the relative persistence of cash flows and accruals) and an increase in the capital invested by hedge funds into exploiting the signal (as measured by hedge fund assets under management and trading volume in extreme accrual decile firms). In light of the roles played by academic accountants in discovering and exploiting the accruals anomaly, we conclude that accounting scholarship can causally affect, not just associatively study, capital market prices and efficiency.

Keywords: Accruals anomaly, market efficiency, hedge funds, accounting scholarship

JEL Classification: M41