Why is the Accrual Anomaly not Arbitraged Away? The Role of Idiosyncratic Risk and Transaction Costs

Abstract

We show that the accrual anomaly documented by Sloan (1996) is concentrated in firms with high idiosyncratic stock return volatility making it risky for risk-averse arbitrageurs to take positions in stocks with extreme accruals. Moreover, the accrual anomaly is found in low price and low volume stocks, suggesting that transaction costs impose further barriers to exploiting accrual mispricing.