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The market mispricing of special items and accruals: one anomaly or two?

Author

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  • T.J. Atwood
  • Hong Xie

Abstract

Purpose - The purpose of this paper is to investigate whether the special items (SI) mispricing reported in Burgstahleret al.is distinct from the accruals (ACC) mispricing documented in Sloan. Design/methodology/approach - This paper employs the control hedge‐portfolio test, non‐overlap hedge‐portfolio test, and regression analysis to determine whether the SI anomaly is distinct from the ACC anomaly. In addition, the Mishkin test is used to examine the impact of SI on the ACC anomaly. Findings - This paper has four main findings. First, one‐year‐ahead abnormal returns to the special‐items‐based hedge portfolio are much diminished when holding ACC constant, whereas those to the ACC‐based hedge portfolio remain significantly positive when holding SI constant. Second, the special‐items‐based hedge portfolio loses much of its ability to earn future abnormal returns without the help of extreme ACC, whereas the ACC‐based hedge portfolio remains profitable without the help of extreme SI. Third, SI are no longer negatively associated with future abnormal returns after controlling for ACC, whereas ACC remain negatively associated with future abnormal returns after controlling for SI. Finally, SI affect the extent to which the market overprices ACC, with negative (positive) SI aggravating (alleviating) ACC overpricing. Originality/value - This is the first paper to show that the SI anomaly is dependent on the ACC anomaly.

Suggested Citation

  • T.J. Atwood & Hong Xie, 2010. "The market mispricing of special items and accruals: one anomaly or two?," Review of Accounting and Finance, Emerald Group Publishing Limited, vol. 9(2), pages 156-179, May.
  • Handle: RePEc:eme:rafpps:v:9:y:2010:i:2:p:156-179
    DOI: 10.1108/14757701011044170
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    Citations

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    Cited by:

    1. Imen Khanchel El Mehdi, 2014. "Accrual and cash flow anomalies in diversified firms: Impact of segment portfolio management," Working Papers 2014-76, Department of Research, Ipag Business School.
    2. repec:ipg:wpaper:2014-076 is not listed on IDEAS
    3. Strydom, Maria & Skully, Michael & Veeraraghavan, Madhu, 2014. "Is the accrual anomaly robust to firm-level analysis?," International Review of Financial Analysis, Elsevier, vol. 34(C), pages 157-165.
    4. Venter, Elmar R. & Cahan, Steven F. & Emanuel, David, 2013. "Mandatory Earnings Disaggregation and the Persistence and Pricing of Earnings Components," The International Journal of Accounting, Elsevier, vol. 48(1), pages 26-53.

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