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The Persistence of the Accruals Anomaly

Last Updated on 10 February, 2024 by Rejaul Karim

The enduring enigma surrounding the accruals anomaly takes center stage in “The Persistence of the Accruals Anomaly” by Baruch Lev and Doron Nissim. This anomaly, characterized by the negative correlation between accounting accruals and subsequent stock returns, has been a focal point in both academic and practitioner realms for nearly a decade.

Despite expectations of sophisticated investors arbitraging this anomaly away, the study highlights the anomaly’s persistent existence, with its magnitude remaining unaltered over time. Evoking perplexing implications, the research uncovers significant prompt responses from institutional investors to accruals information, albeit predominantly from a minority of active investors.

It delineates the unattractive nature of extreme accruals firms to most institutional investors as a primary impediment, while individual investors struggle to capitalize on accruals information due to high transaction and information costs. Consequently, the study underlines the enduring resilience of the accruals anomaly, hinting at its probable perpetuation.

Abstract Of Paper

The accruals anomaly – the negative relationship between accounting accruals and subsequent stock returns – has been well documented in the academic and practitioner literatures for almost a decade. To the extent that this anomaly represents market inefficiency, one would expect sophisticated investors to learn about it and arbitrage the anomaly away. Yet, we show that the accruals anomaly still persists and its magnitude has not declined over time. While we find that institutional investors react promptly to accruals information, it is clear that their reaction is rather weak and is primarily characteristic of active investors who constitute a minority of institutions. The main reason: Extreme accruals firms have characteristics which are unattractive to most institutional investors. Individual investors are by and large unable to profit from trading on accruals information due to the high transaction and information costs associated with implementing a consistently profitable accruals strategy. Consequently, the accruals anomaly persists, and will probably endure.

Original paper – Download PDF

Here you can download the PDF and original paper of The Persistence of the Accruals Anomaly.

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Author

Baruch Lev
New York University – Stern School of Business

Doron Nissim
Columbia University – Columbia Business School

Conclusion

In summation, “The Persistence of the Accruals Anomaly” by Baruch Lev and Doron Nissim illuminates the ongoing resilience of the accruals anomaly and its implications for market efficiency.

Despite its well-established presence in academic and practitioner literature, the anomaly continues to endure with unabated magnitude over time, defying expectations of its mitigation. The study’s discernment of institutional investors’ prompt but relatively weak reactions to accruals information, primarily by a minority of active investors, underscores the enduring nature of the anomaly.

Furthermore, the unattractive attributes of extreme accruals firms to most institutional investors, coupled with prohibitive transaction and information costs for individual investors, solidify the anomaly’s persistent existence.

Ergo, the research suggests that the accruals anomaly is poised to endure, signifying an enduring puzzle in the realm of stock returns and investor behavior.

Related Reading:

Is the Accrual Anomaly a Global Anomaly?

The Accrual Anomaly

FAQ

What is the main focus of the paper “The Persistence of the Accruals Anomaly” by Baruch Lev and Doron Nissim?

The main focus of the paper is on the accruals anomaly, which refers to the negative relationship between accounting accruals and subsequent stock returns. The accruals anomaly has been a notable phenomenon in both academic and practitioner literature for almost a decade. Despite expectations that sophisticated investors would arbitrage away this anomaly, the study explores the persistence of the accruals anomaly and its magnitude over time.

What is the accruals anomaly, and why is it considered an enduring puzzle?

The accruals anomaly is characterized by the negative correlation between accounting accruals and subsequent stock returns. It is considered an enduring puzzle because, from an efficiency standpoint, one would expect sophisticated investors to recognize and exploit such anomalies, leading to their mitigation over time. However, the study finds that the accruals anomaly persists, and its magnitude does not decline over time, raising questions about the factors contributing to its enduring nature.

What are the key findings regarding the persistence of the accruals anomaly?

The key findings of the study include the continued existence of the accruals anomaly and the unaltered magnitude of the anomaly over time. Despite the documented negative relationship between accruals and subsequent stock returns, the anomaly does not diminish as one might expect over the years. The research sheds light on institutional investors’ reactions to accruals information, emphasizing that while there is prompt reaction, it is relatively weak and primarily comes from a minority of active investors.

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