The countercyclical long-term operating accrual-based trading strategy in the Stoxx Europe 600 index: The importance of asset and liability components.

Abstract

This work uses long-term operating accruals, rather than current, as an accounting measure to identify major anomalies. Past and abundant accounting and financial literature associates anomalies with problems of reliability and assigns lower reliability to long-term operating accruals than to current accruals. We investigate the relation between scaled operating accruals and size-adjusted abnormal returns for nonfinancial firms listed in the Stoxx Europe 600 index for the period 2000-2021. We find consistent evidence of (1) a higher long-term operating accrual anomaly than working capital accrual, especially, when asset and liability components are separated (2) long-short trading strategies aimed at taking advantage of the anomaly that achieves significant annual returns between 2% and 6% and (3) this trading strategy strongly reduces the risk of stock portfolios during an economic crisis due to its countercyclical nature. These findings have important implications not only for academics, but also for asset managers who want to protect the return of their stock portfolios from high market volatility.