Accrual mispricing, value-at-risk, and expected stock returns

Prodosh Simlai ()
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Prodosh Simlai: University of North Dakota

Review of Quantitative Finance and Accounting, 2021, vol. 57, issue 4, No 12, 1487-1517

Abstract: Abstract We investigate the extent to which a parsimonious measure of maximum likely loss that captures the tail risk of returns—known as value-at-risk (VaR)—explains the relationship between accruals and the cross-sectional dispersion of expected stock returns. We construct portfolios based on Sloan’s (Account Rev 71(3):289–315, 1996) total accruals (TA) measure and individual asset-level VaR, which reflects the dynamic behavior of the asset distribution. We document that VaR is in congruence with portfolio-level accruals and that there is a significant positive relationship between VaR and the cross-section of portfolio returns. Allowing a double-sort involving VaR and TA further suggests that the spread between low- and high-TA portfolios is significantly attenuated after controlling for VaR. We also conduct a firm-level cross-sectional regression analysis and demonstrate that the TA- and VaR-based characteristics—but not the factor-mimicking portfolios—are compensated with higher expected returns, and that VaR neither subsumes nor is subsumed by TA. Finally, our cross-sectional decomposition analysis suggests that the firm-level VaR captures at least 7% of the accrual premium even in the presence of size and book-to-market. These findings lend support for the mispricing explanation of the accrual anomaly.

Keywords: Accruals; Value-at-risk; Abnormal returns; Anomalies; Mispricing; Cross-section of returns (search for similar items in EconPapers)
JEL-codes: C4 G11 G12 M41 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (2)

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DOI: 10.1007/s11156-021-00985-2

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