Review of Accounting Studies

, Volume 8, Issue 2, pp 251-276

First online:

Investor Sophistication and the Mispricing of Accruals

  • Daniel W. CollinsAffiliated withTippie College of Business, University of Iowa
  • , Guojin GongAffiliated withTippie College of Business, University of Iowa
  • , Paul HribarAffiliated withJohnson School of Management, Cornell University

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This paper examines the role of institutional investors in the pricing of accruals. Using Bushee;s (1998) classification of institutional investors, we show that firms with a high level of institutional ownership and a minimum threshold level of active institutional traders have stock prices that more accurately reflect the persistence of accruals. This result holds after controlling for differences in the persistence of accruals between firms with high and low institutional ownership, and after controlling for other characteristics that are correlated with institutional ownership and future returns. Additionally, firms with low institutional ownership are smaller, less profitable, and have lower share turnover, suggesting that limits to arbitrage impede institutional investors from exploiting the seemingly large abnormal returns for these firms.

accruals mispricing institutional investors