Selection of Asset Pricing Model and Accrual Anomaly

Counter-Evidence to the Functional Fixation Hypothesis

Abstract

　Before testing the rational expectations hypothesis, it is necessary to fix an asset-pricing model that is to be used in the statistical test. Therefore, whether accounting accruals are rationally priced or mispriced depends on the selected asset-pricing model. By comparing multiple candidates of a benchmark-pricing model, we reexamine the accrual anomaly in this study. The obtained empirical results are not supportive of the functional fixation hypothesis and there is a possibility that accruals are rationally priced by market participants.