Strategy Library

Accrual Anomaly

Introduction

Accrual anomaly is based upon the reasoning that it is important to measure if a company's earnings are based on real cash inflow or on revenue recognition from questionable accounting practices. Since companies with lower levels of accruals have more certain real earnings, they should earn higher market returns. This strategy will take a long position in low accrual companies and a short position in high accrual accompanies. It is important to note that this strategy requires fundamental data from the current and past year in order to perform its analysis. As a result, it won't be implementable in live trading at this time.

Method

The first step is coarse and fine universe selection. Using coarse selection, we create an investment universe with stocks that have fundamental data. The universes will be saved so that we can perform analysis on the annual changes of specific balance sheet data in the following year.

 def CoarseSelectionFunction(self, coarse):
        if self.yearly_rebalance:
            self.filtered_coarse = [x.Symbol for x in coarse if (x.HasFundamentalData)
                                                            and (x.Market == "usa")]
            return self.filtered_coarse
        else: 
            return []      
    
def FineSelectionFunction(self, fine):
    if self.yearly_rebalance:
        fine = [x for x in fine if (float(x.FinancialStatements.BalanceSheet.CurrentAssets.Value) > 0) 
                                and (float(x.FinancialStatements.BalanceSheet.CashAndCashEquivalents.Value) > 0)
                               and (float(x.FinancialStatements.BalanceSheet.CurrentLiabilities.Value) > 0)
                                and (float(x.FinancialStatements.BalanceSheet.CurrentDebt.Value) > 0)
                                and (float(x.FinancialStatements.BalanceSheet.IncomeTaxPayable.Value) > 0)
                                and (float(x.FinancialStatements.IncomeStatement.DepreciationAndAmortization.Value) > 0)]
        
        if not self.previous_fine:
            self.previous_fine = fine
            self.yearly_rebalance = False
            return []
        else:
            self.filtered_fine = self.CalculateAccruals(fine,self.previous_fine)
            sorted_filter = sorted(self.filtered_fine, key=lambda x: x.bs_acc)
            self.filtered_fine = [i.Symbol for i in sorted_filter]
            self.previous_fine = fine
            return self.filtered_fine
    else:
        return []

During fine universe selection we take the stocks from the previous and current year and calculate their balance sheet based accrual values. The stocks are then sorted in ascending order based upon the implemented formula. Note that we account for size difference across the sample firms by scaling the accruals by the average of the beginning and end-of-year book value of total assets.

 def CalculateAccruals(self, current, previous):
    accruals = []
    for stock_data in current:
        try:
            prev_data = None
            for x in previous:
                if x.Symbol == stock_data.Symbol:
                    prev_data = x
                    break
            
            delta_assets = float(stock_data.FinancialStatements.BalanceSheet.CurrentAssets.Value)-float(prev_data.FinancialStatements.BalanceSheet.CurrentAssets.Value)
            delta_cash = float(stock_data.FinancialStatements.BalanceSheet.CashAndCashEquivalents.Value)-float(prev_data.FinancialStatements.BalanceSheet.CashAndCashEquivalents.Value)
            delta_liabilities = float(stock_data.FinancialStatements.BalanceSheet.CurrentLiabilities.Value)-float(prev_data.FinancialStatements.BalanceSheet.CurrentLiabilities.Value)
            delta_debt = float(stock_data.FinancialStatements.BalanceSheet.CurrentDebt.Value)-float(prev_data.FinancialStatements.BalanceSheet.CurrentDebt.Value)
            delta_tax = float(stock_data.FinancialStatements.BalanceSheet.IncomeTaxPayable.Value)-float(prev_data.FinancialStatements.BalanceSheet.IncomeTaxPayable.Value)
            dep = float(stock_data.FinancialStatements.IncomeStatement.DepreciationAndAmortization.Value)
            avg_total = (float(stock_data.FinancialStatements.BalanceSheet.TotalAssets.Value)+float(prev_data.FinancialStatements.BalanceSheet.TotalAssets.Value))/2

            stock_data.bs_acc = ((delta_assets-delta_cash)-(delta_liabilities-delta_debt-delta_tax)-dep)/avg_total
            accruals.append(stock_data)
        except:
            pass
    return accruals

In OnData(), we short top decile of the stocks in the sorted list and long the bottom decile of stocks. The portfolio is rebalanced every year at the start of June.

Algorithm

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