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Time-varying risk, mispricing attributes, and the accrual premium

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  • Simlai, Prodosh E.

Abstract

We examine the mispricing attributes of the accrual effect in the presence of time-varying common risk factors, which are not independent of aggregate economic conditions. We find that the persistence of unconditional abnormal returns for accrual-based portfolios is not independent of firm-level characteristics such as size and book-to-market ratio (BE/ME). However, after adjusting for time-varying risk measures, the premiums associated with accruals and firm fundamentals are distinct from one another. The empirical evidence shows that a long-short hedge portfolio based on accruals and BE/ME generates significant abnormal returns even in the presence of time-varying risk. Taken together, our time-series and cross-sectional evidence strengthens the assertion that the well-known accrual effect is significantly associated with high-BE/ME value firms that tend to be low-investment firms. The fact that time-varying risk adds to the description of average returns of accrual-sorted portfolios and corroborates the presence of the accrual premium contributes significantly to the literature.

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  • Simlai, Prodosh E., 2016. "Time-varying risk, mispricing attributes, and the accrual premium," International Review of Financial Analysis, Elsevier, vol. 48(C), pages 150-161.
    • Handle: RePEc:eee:finana:v:48:y:2016:i:c:p:150-161
    DOI: 10.1016/j.irfa.2016.09.014
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    More about this item

    Keywords

    Total accruals; Size; Book-to-market; Mispricing; Abnormal returns; Cross-section of stock returns;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M42 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Auditing

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