The Mispricing of Abnormal Accruals

Source: Xie (2001) · The Accounting Review · DOI: 10.2308/accr.2001.76.3.357

TL;DR

Sloan (1996) showed the market overprices total accruals. Xie decomposes accruals into normal and abnormal (discretionary) accruals (Jones model) and shows the overpricing is driven by the abnormal component: the market overestimates the persistence of discretionary accruals and overprices them (56,692 firm-years, 1971–1992).

What anomaly it documents

Predictor: abnormal (discretionary) accruals from the Jones (1991) model.

Direction: negative — high abnormal accruals → low future returns.

Shape: the accrual anomaly concentrates in the discretionary component.

OSAP predictor: AbnormalAccruals.

How to construct it

Sorting variable: Jones-model residual (abnormal) accruals.

Universe: NYSE/AMEX/Nasdaq firms with statements (1971–1992).

Portfolio formation: rank into abnormal-accrual deciles.

Long / short: long low abnormal accruals, short high.

Weighting: equal-weighted.

Rebalancing: annual, after statements.

Evidence and replication

Period	Notes	Source
1971–1992	market overprices abnormal accruals' persistence (56,692 firm-years)	this paper
OOS (post-2001)	accrual anomaly persists but has weakened	post-publication
OSAP (AbnormalAccruals)	replicates	Chen & Zimmermann 2022

Why it might work

Earnings fixation: investors take reported earnings at face value and ignore low-persistence accrual components.

Discretion = manipulation: abnormal accruals proxy for earnings management that later reverses.

Limitations and risks

Model dependence: 'abnormal' accruals depend on the Jones-model specification.

Decay: the accrual anomaly has shrunk since the 2000s.

Small-firm tilt: strongest in less liquid names.

Key references

Xie, H. (2001) — The Mispricing of Abnormal Accruals — The Accounting Review — DOI: 10.2308/accr.2001.76.3.357

Sloan, R. (1996) — Do Stock Prices Fully Reflect Information in Accruals and Cash Flows? — TAR

Provenance: verified/generated from the paper's full text.