The market mispricing of special items and accruals: one anomaly or two?

T.J. Atwood (Department of Accounting, Florida State University, Tallahassee, Florida, USA)
Hong Xie (Von Allmen School of Accountancy, University of Kentucky, Lexington, Kentucky, USA)

Review of Accounting and Finance

ISSN: 1475-7702

Publication date: 18 May 2010

Abstract

Purpose

The purpose of this paper is to investigate whether the special items (SI) mispricing reported in Burgstahler et al. is distinct from the accruals (ACC) mispricing documented in Sloan.

Design/methodology/approach

This paper employs the control hedge‐portfolio test, non‐overlap hedge‐portfolio test, and regression analysis to determine whether the SI anomaly is distinct from the ACC anomaly. In addition, the Mishkin test is used to examine the impact of SI on the ACC anomaly.

Findings

This paper has four main findings. First, one‐year‐ahead abnormal returns to the special‐items‐based hedge portfolio are much diminished when holding ACC constant, whereas those to the ACC‐based hedge portfolio remain significantly positive when holding SI constant. Second, the special‐items‐based hedge portfolio loses much of its ability to earn future abnormal returns without the help of extreme ACC, whereas the ACC‐based hedge portfolio remains profitable without the help of extreme SI. Third, SI are no longer negatively associated with future abnormal returns after controlling for ACC, whereas ACC remain negatively associated with future abnormal returns after controlling for SI. Finally, SI affect the extent to which the market overprices ACC, with negative (positive) SI aggravating (alleviating) ACC overpricing.

Originality/value

This is the first paper to show that the SI anomaly is dependent on the ACC anomaly.

Keywords

Citation

Atwood, T. and Xie, H. (2010), "The market mispricing of special items and accruals: one anomaly or two?", Review of Accounting and Finance, Vol. 9 No. 2, pp. 156-179. https://doi.org/10.1108/14757701011044170

Download as .RIS

Publisher

:

Emerald Group Publishing Limited

Copyright © 2010, Emerald Group Publishing Limited

Please note you might not have access to this content

You may be able to access this content by login via Shibboleth, Open Athens or with your Emerald account.
If you would like to contact us about accessing this content, click the button and fill out the form.
To rent this content from Deepdyve, please click the button.