The Accrual Anomaly: Risk or Mispricing?



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 SMB and HML factors 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.
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Mathijs van Dijk