Pricing the accrual effect in an emerging market

Abstract

Empirical finding that the stocks with low accruals return higher than the stocks with high accruals is one of the most prominent market anomalies documented in financial economics literature. Evidence from developed markets suggests that the Capital Asset Pricing Model (CAPM), three-factor (3 F) model with the factors of excess market return (rm -rf), size (SMB) and value (HML) and five-factor (5 F) model with additional earnings-based profitability (RMW) and investment (CMA) factors cannot deflate the accrual effect. Recent evidence from the U.S. market suggests that accrual effect loses power when it is conditioned against a cash-based operating profitability factor. This paper investigates the accrual effect and its pricing for the stocks listed on Borsa Istanbul (BIST). Portfolio analysis reveals a significant accrual effect among the profitable stocks that gain strength when conditioned against CAPM. However, the 3 F model can deflate the accrual effect and different profitability factors, including cash-based operating profitability factor, and investment factor cannot improve its pricing or economic performance in an emerging market.