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There are Two Very Different Accruals Anomalies

Last Updated on 10 February, 2024 by Rejaul Karim

The research paper titled “There are Two Very Different Accruals Anomalies” presents a thought-provoking exploration into the multifaceted nature of accruals and their nuanced implications. Authored by Andrew L. Detzel, Philipp D. Schaberl, and Jack Strauss from esteemed business schools, this study navigates the intricate delineation between investment and non-investment-related components of accruals, unearthing divergent asset-pricing implications.

Remarkably, the exposure to an investment-accruals factor emerges as a superior determinant of cross-sectional returns compared to the accruals themselves, with its returns notably influenced by sentiment. In a striking juxtaposition, non-investment accruals manifest contrasting dynamics.

The research introduces a paradigm shift in the understanding of accruals anomalies, revealing their dual identity as a risk-based investment accruals premium and a mispricing of non-investment accruals, thereby challenging existing theories and offering a compelling resolution to the fragmented evidence surrounding this anomaly.

Abstract Of Paper

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 the accruals themselves, and this factor’s returns are negatively predicted by sentiment. The opposite results hold for non-investment accruals. Further tests show 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 help resolve mixed evidence by showing that the anomaly is two separate phenomena: a risk-based investment accruals premium and a mispricing of non-investment accruals.

Original paper – Download PDF

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Author

Andrew L. Detzel
Baylor University – Hankamer School of Business

Philipp D. Schaberl
University of Northern Colorado – Monfort College of Business

Jack Strauss
University of Denver – Daniels College of Business

Conclusion

In conclusion, “There are Two Very Different Accruals Anomalies” by Andrew L. Detzel, Philipp D. Schaberl, and Jack Strauss presents a paradigm-shifting delineation of the complexities within accruals anomalies.

The study’s unequivocal documentation of the divergent asset-pricing implications for investment and non-investment-related accrual components sheds new light on this phenomenon. Notably, exposure to the investment-accruals factor emerges as a superior determinant of cross-sectional returns, in stark contrast to non-investment accruals, the returns of which exhibit contrary dynamics and susceptibility to sentiment.

With further tests revealing how cash profitability uniquely encompasses the long-term non-investment accruals in the cross-section of returns, this research offers a pivotal resolution to the fragmented evidence by unveiling the duality of the accruals anomaly. It crystallizes as two distinct phenomena: a risk-based investment accruals premium and a mispricing of non-investment accruals, effectively challenging and transcending existing theories, thus opening new pathways for future inquiries and empirically enriching the understanding of asset pricing.

Related Reading:

Analysts’ Cash Flow Forecasts and the Decline of the Accruals Anomaly

Anomalies Abroad: Beyond Data Mining

FAQ

What is the main focus of the research paper “There are Two Very Different Accruals Anomalies”?

The main focus of the research paper is to explore the multifaceted nature of accruals and their implications for asset pricing. The authors specifically distinguish between investment and non-investment-related components of accruals to uncover divergent asset-pricing implications.

What key findings are presented regarding investment and non-investment-related components of accruals?

The research finds that exposure to an investment-accruals factor explains cross-sectional returns better than the accruals themselves. The returns of the investment-accruals factor are negatively predicted by sentiment. In contrast, non-investment accruals exhibit opposite dynamics. The study highlights the dual identity of accruals anomalies, presenting them as a risk-based investment accruals premium and a mispricing of non-investment accruals.

How does exposure to the investment-accruals factor compare to non-investment accruals in determining cross-sectional returns?

Exposure to the investment-accruals factor is shown to be a superior determinant of cross-sectional returns compared to non-investment accruals. The findings suggest that the risk-based investment accruals premium plays a more significant role in explaining returns than non-investment accruals.

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