The Persistence of the Accruals Anomaly

By Baruch Lev, Doron Nissim. 2006

184 citations recorded by the source corpus.

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.

Subfields: Accounting, Finance, Management Science and Operations Research

View Paper: https://www.semanticscholar.org/paper/5648da8e2ad1abcd91ac06aa0e390df9ced25425

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Citations in the corpus

The Limits of the Limits of Arbitrage (2010, background): “Lev and Nissim (2006) also show that high accrual firms are characterized by high residual variability, low market capitalizations, low book to market ratios, low prices, and reduced likelihood of institutional ownership.”
Why is the Accrual Anomaly not Arbitraged Away? The Role of Idiosyncratic Risk and Transaction Costs (2006, background): “Lev and Nissim (2006) attribute the persistence of the accrual anomaly over time to lack of institutional trading in stocks with extreme accruals.”
A Review of the Value Relevance Literature (2009, background): “Lev and Nissim [106] show that the so-called accrual anomaly documented by Sloan [32] still exists and that its magnitude has not decreased over time.”
Agency Theory of Overvalued Equity as an Explanation for the Accrual Anomaly (2006, unknown): “…and Lakonishok (2006), D’Avolio, Gildor, and Shleifer (2001), Desai, Rajgopal and Venkatachalam (2004), Hirshleifer, Teoh and Yu (2005), Houge and Loughran (2001), Kraft, Leone, and Wasley (2006), Lesmond and Wang (2005), Lev and Nissim (2006), Teoh and Zhang (2006), and Thomas and Zhang (2002).”
The usefulness of accounting estimates for predicting cash flows and earnings (2010, unknown): “As for the contribution of estimates to the prediction of earnings—it is smaller in the recent period than in the early one, likely reflecting once more the management of earnings via estimates which has increased substantially in the 1990s (for example, Lev and Nissim 2006 ).”
Earnings Manipulation and Expected Returns (2013, background): “More recently, the focus has shifted to the limits of arbitrage and market-learning-related explanations (Mashruwala, Rajgopal, and Shevlin 2006; Lev and Nissim 2006; Li and Sullivan 2011; Green et al. 2011).”