There are two very different accruals anomalies

Abstract

We document that several well‐known asset‐pricing implications of accruals differ for investment and non‐investment‐related components. Exposure to an investment‐accruals factor explains the cross‐section of returns better than accruals themselves, and sentiment negatively predicts this factor's returns. The opposite results hold for non‐investment accruals. Cash profitability only subsumes long‐term non‐investment accruals in the cross‐section of returns and economy‐wide investment accruals negatively predict stock‐market returns while other accruals do not. These results challenge existing accruals‐anomaly theories and resolve mixed evidence by showing the anomaly is two separate phenomena: a risk‐based investment accruals premium and a mispricing of non‐investment accruals.

The countercyclical long-term operating accrual-based trading strategy in the Stoxx Europe 600 index: The importance of asset and liability components

“…Detzel et al . [ 1 ] distinguish two accrual anomalies: a risk-based premium for accruals that capture real investment–related to the growth hypothesis -, and short-lived mispricing of accruals that capture transitory adjustments to profitability—related to the persistence hypothesis.…”

“…To measure their firm’s current-period operating performance, accountants compute earnings by adding adjustments called accruals to free cash flow [ 1 ]. Sloan [ 2 ] first documented a negative relationship between current accruals and stock returns in the USA, identifying an accrual anomaly due to incorrect investor valuations based on the accounting information contained in those accruals.…”

Structural innovation in state variables and expected stock returns

“…Unlike the size effect, which has lessened in recent years, the value effect continues to be economically significantespecially among small-cap stocks that are held by less sophisticated investors and are expensive to arbitrage (Yara et al, 2021). Moreover, although the magnitude of the accrual premium varies due to differences in accrual definitions (Detzel et al, 2018), the existing evidence suggests that the strength of the accrual effect has not dissipated, even 20 years after its discovery (Lewellen and Resutek, 2016). Interestingly, it has been recognized that the abnormal returns of accrual-sorted portfolios are dependent on firm size and fundamental-to-price ratios such as book-to-market (see e.g.…”

“…Although the size effect has lessened in recent years, the BE/ME effect continues to be economically significant among small-size stocks (Asness et al, 2013;French, 2016, 2020a;Yara et al, 2021). The accrual effect also continues to be robust and is known to be significant among small-cap and high-BE/ME stocks (Desai et al, 2004;Detzel et al, 2018;Gu, 2020;Khan, 2008;Lewellen and Resutek, 2016). Given the proliferation of trading strategies and actively managed funds that used firm valuation metrics, it is in the interest of investors and financial advisors alike to understand whether the return dynamics of multidimensional portfolios constructed using the intersection of firmlevel attributes are sensitive to exogenous innovation in state variables.…”

Accrual mispricing, value-at-risk, and expected stock returns

“… 1 An incomplete list of recent works on the accrual anomaly includes Ali and Gurun ( 2009 ), Detzel et al ( 2018 ), Fama and French ( 2008 , 2016 ), Gu ( 2020 ), Hirshleifer and Jiang ( 2010 ), Hirshleifer et al ( 2011 ), Hou et al ( 2020 ), Khan ( 2008 ), Lewellen and Resutek ( 2016 ), Ohlson and Bilinski ( 2015 ) and Stambaugh et al ( 2012 ). …”