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A Simple Model Relating Accruals to Risk, and its Implications for the Accrual Anomaly
Author(s) -
Khan Mozaffar
Publication year - 2012
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/j.1468-5957.2011.02275.x
Subject(s) - accrual , econometrics , economics , portfolio , anomaly (physics) , mean reversion , hedge , capital asset pricing model , systematic risk , financial economics , earnings , accounting , physics , ecology , biology , condensed matter physics
This paper models systematic risk as a function of mean‐reverting accruals. When the true abnormal returns are zero, but the true betas are empirically unobserved, the model predicts the anomalous pattern of empirical results on the accrual anomaly: (i) CAPM abnormal returns to an accrual hedge portfolio are positive on average, (ii) are positive in almost all years, (iii) decay as the holding period is extended beyond one year, and (iv) the Mishkin (1983) test of market efficiency is rejected. Using simulations, small and plausible degrees of risk mismeasurement also reproduce the magnitudes of prior results on the accrual anomaly.