A Simple Model Relating Accruals to Risk, and its Implications for the Accrual Anomaly

Mozaffar Khan

Research output: Contribution to journalArticlepeer-review

2 Scopus citations

Abstract

This paper models systematic risk as a function of mean-reverting accruals. When the true abnormal returns are zero, but the true betas are empirically unobserved, the model predicts the anomalous pattern of empirical results on the accrual anomaly: (i) CAPM abnormal returns to an accrual hedge portfolio are positive on average, (ii) are positive in almost all years, (iii) decay as the holding period is extended beyond one year, and (iv) the Mishkin (1983) test of market efficiency is rejected. Using simulations, small and plausible degrees of risk mismeasurement also reproduce the magnitudes of prior results on the accrual anomaly.

Original languageEnglish (US)
Pages (from-to)35-59
Number of pages25
JournalJournal of Business Finance and Accounting
Volume39
Issue number1-2
DOIs
StatePublished - Jan 1 2012

Keywords

  • Accrual anomaly
  • Expected return models
  • Mispricing
  • Simulation

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