Earnings-Based and Accrual-Based Market Anomalies: One Effect or Two?

This paper investigates whether the accrual pricing anomaly documented by Sloan (1996) for annual data holds for quarterly data and whether this form of market mispricing is distinct from the post-earnings announcement drift anomaly. We find that the market appears to overestimate (underestimate) the persistence of the accrual (cash flow) component of quarterly earnings and, therefore, tends to overprice (underprice) accruals (cash flows). Moreover, the accrual (cash flow) mispricing appears to be distinct from post-earnings announcement drift. A hedge portfolio trading strategy that exploits both forms of market mispricing generates abnormal returns in excess of those based on unexpected earnings, accruals, or cash flow information alone.