Abstract

I quantitatively evaluate how much of the cross-sectional return predictive ability of a range of accounting anomalies can be attributed to firm-specific stock return covariances with market risk factors. Using a novel two-step regression-based testing method, I find robust evidence that the risk factor exposures do not explain a meaningful fraction of the time-series variations in the return predictive coefficients of the anomaly variables. Out-of-sample tests further confirm that it is the mispricing component of the accounting anomalies that is mainly responsible for the return predictability.