An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Ashiq Ali
The University of Texas at Dallas

Xuanjuan Chen
University of North Carolina At Wilmington

Tong Yao
University of Arizona

Tong Yu
University of Rhode Island

Abstract: Using data on both fund stockholdings and fund returns for the period 1984 to 2003, we show that actively-managed equity mutual funds are able to make significant excess returns net of actual transaction costs from trading on accruals and net operating assets (NOA) anomalies. We find that the top 10% of mutual funds that most aggressively follow the accruals strategy exhibit Fama-French 3-factor alpha of 3.42% per year and the top 10% of mutual funds that most aggressively follow the NOA strategy exhibit Fama-French 3-factor alpha of 2.75% per year. We also find that mutual funds more actively using the accruals or NOA strategy exhibit higher volatility in both their net returns and fund flow. These factors likely represent the adverse consequences of arbitrage risk that funds face when they trade aggressively on these anomalies (Shleifer & Vishny 1997).

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