Chapter 2
The Accrual Anomaly
The accrual anomaly is unique among asset pricing anomalies in several respects. First, at the time of its discovery, it was the most robust anomaly ever discovered. Second, the anomalous asset pricing behavior associated with accruals has gradually declined in the years since its original discovery. Third, the accrual anomaly is not really an anomaly at all. In fact, the original research documenting the accrual anomaly predicted that it would be there. The term anomaly is usually reserved for behavior that deviates from existing theories, but when Sloan (1996) first documented the accrual anomaly, he was testing a well-known theory and found that it was supported.
Sloan (1996) set out to test the theory that investors fixate too heavily on corporate earnings in establishing stock prices. This theory can be traced back at least as far as Graham and Dodd (1934, pp. 350–352) and has been widely espoused ever since. What changed in the meantime was that some prominent finance academics developed their own new theory, which they called the efficient market hypothesis, and they soon declared any evidence inconsistent with their theory to be anomalous. Meanwhile, their academic accounting brethren concluded that if stock prices were closely linked to accounting earnings, it must be because earnings did a great job of summarizing intrinsic value. For a while, everyone was happy with this state ...
