Percent accruals and the accrual anomaly: evidence from the UK

Abstract

ABSTRACT Using the percent accrual measure proposed by Hafzalla, N., Lundholm, R., & Van Winkle, M. (2011. Percent accruals. The Accounting Review, 86, 209–236), we empirically evaluate the predictions of earnings fixation hypothesis and limits to arbitrage hypothesis on the accrual anomaly in the U.K. stock market. We show a strong negative relation of percent accruals with future profitability and stock returns. We find that the effect of percent accruals on future earnings and stock price performance is stronger across loss firms relative to profit firms. Furthermore, we show that the effect of percent accruals on stock returns is more pronounced for micro stocks relative to small stocks, while it doesn’t occur across big stocks. Overall, we conclude that earnings fixation is a key factor in explaining the occurrence of the percent accrual anomaly, while limits to arbitrage are of great significance in explaining the persistence of the anomaly.