One of the most widely studied and persistent stock market inefficiencies ever identified is the “accrual anomaly”. It was first documented by Richard Sloan of the University of Michigan in 1996 whose ground-breaking paper found that shares in companies with small or negative accrual ratios vastly outperform (+10% annually) those of companies with large ones.
Sloan was apparently involved with auditing speculative mining companies before going into academia, which may have inspired him. In order to test out the longstanding view that investors fixate too heavily on corporate earnings and not on cash generation, he decided to rank companies based on their “accrual ratio” for last year’s results, i.e the size of non-cash earnings relative to total assets. He then measured how their shares performed in the year after the results were announced, effectively “going long” the top decile of stocks with the lowest accrual ratio and “going short” the bottom decile with the highest accrual ratio.
What are Accruals anyway?
Accruals are estimates made by accountants to align revenues and costs in a specific period. Theoretically, if all buyers and suppliers paid in cash when the services were provided, there would be no need for accrual accounting, but the reality of modern commerce…
Disclaimer: Please note all prices are for information only, they should not be relied upon for accuracy or trading. All prices quotes are based on CFD prices and are similar though not always identical to real exchange prices. STOCKTRKR or anybody connected with STOCKTRKR will not accept any liability for loss or damage arising from use of any information/commentary/charts or articles which is provided 'as is' for educational purposes only, nothing contained on this website should be considered as investment advice - please seek proper investment advice from registered financial broker or institution if you wish to trade on global markets and ensure you are familiar with the risks.
