How do investors price accrual risk during crises?

Under rational asset pricing theory, and in efficient, frictionless market, risk should be priced contemporaneously and, thus, the market meltdown during the COVID‐19 pandemic must have been a contingent valuation of newly created risk. In contrast, we find that the reduction in equity value during the pandemic was stronger for stocks with higher pre‐pandemic accrued risk. This lends support to the discrete pricing proposition, which is a form of behavioural bias where investors price accrued risk during significant corporate or macroeconomic events. Furthermore, we compare the pricing of accrued risk during the pandemic with the pricing of accrued risk during non‐pandemic events and during past financial crises. We report evidence that pricing of accrued risk results in a premium in normal times and a discount during financial turmoil. Finally, we report evidence that investors price accrued stocks discriminately, that is, they are more likely to price accrued risk of stocks of larger firms, smaller B/M, and weaker momentum. Several theoretical and practical implications are discussed inside the paper.