Investor Sentiment and Mispricing of Abnormal Accruals

This paper examines the implication of investor sentiment for the pricing of discretionary or abnormal accruals. We consider a setting where the market-wide investor sentiment information can provide a profitable trading strategy to generate an excess risk-adjusted return from abnormal accrual mispricing. We find that abnormal accrual mispricing is persistent even after controlling the systematic risk factors. Due to the investors' overpricing of income increasing abnormal accrual information, the trading strategy that goes long (short) on low (high) abnormal accrual portfolios generates significant hedge portfolio returns following a high sentiment period