The Persistence of the Accruals Anomaly

Abstract

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.