The Accrual Anomaly in Australia: A Closer Look at Trading Strategy Returns

Abstract

We conduct a detailed examination of the accrual anomaly in Australia using a trading strategy research design. Our primary contribution is to show how sensitive the results are to the precise research design specifications. We focus on four key areas of importance in designing such tests. First, the choice of proxy for total accruals; second, the definition of abnormal returns (i.e., the return generating model); third, the impact of data trimming as a response to exceptionally large returns; and fourth, the choice between value or equal weighting of returns. We show that research design choices do matter, and in doing so we also provide some reconciliation of apparently conflicting prior evidence of any accrual anomaly in Australia. Our results suggest the need for caution in drawing inferences from specific research design specifications in trading strategy tests of the accrual anomaly.