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A Simple Model Relating Accruals to Risk, and its Implications for the Accrual Anomaly


  • Mozaffar Khan

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    • The author is from the university of Minnesota He thanks Jeff Callen, Hui Chen, Leonid Kogan, S.P. Kothari, Stan Markov, Peter Pope, Sugata Roychowdhury, Konstantin Rozanov, Gim Seow, Andrew Stark (editor), Kevin Wang, Ross Watts, Joe Weber, an anonymous referee, and seminar participants at Duke, MIT and the University of Connecticut for helpful discussions and comments. An earlier version of this paper was circulated under the title ‘What can we conclude from common tests of accrual mispricing?’ (Paper received July 2009, revised version accepted December 2011)

Mozaffar Khan, Carlson School of  Management, 321 19th Ave S., Minneapolis 55455, USA.e-mail:


Abstract:  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.