For final verification of the occurrence of accrual anomaly in the Brazilian capital market, we constructed a zero-investment portfolio based on the magnitude of accruals.
The procedure generally used to test this property consists of analyzing a zero-investment portfolio.
Bernard, Thomas and Wahlen (1997) pointed out that an anomaly based on accounting numbers will indicate mispricing by the market only if the returns provided by a zero-investment portfolio are consistently positive.
To verify whether a zero-investment portfolio based on accruals produces consistently positive returns in the Brazilian market, we distributed the assets by quintiles formed by the magnitude of the accruals component of earnings, resulting in the composition of five portfolios, one for each quintile (1 to 5).
Specifically, the procedure consists of forming zero-investment portfolios from assets that compose the sample, based on the magnitude of the accruals, and identifying the returns obtained by taking a long (short) position in assets with low (high) accruals and by hedging the returns of assets with extreme accruals.