Correspondence: Qiao Liu, School of Economics and Finance, University of Hong Kong, Polfulam, Hong Kong

¹is Assistant Professor of Finance at the University of Miami. His research interests focus on empirical asset pricing, executive compensation, and the interaction between asset markets and corporate governance. He is a member of the American Economic Association, the American Finance Association, the Western Finance Association, and the Financial Management Association.

²is Associated Professor of Finance at the University of Hong Kong.

³is Assistant Professor of Finance at St. John's University. Her research interests focus on international finance, corporate finance and financial services. She is also active in various professional associations, including the Financial Management Association, the Eastern Finance Association, and the Financial Services Symposium.

Received 22 September 2008; Revised 22 September 2008.

Abstract

We propose a market-timing strategy that aims to exploit aggregate accruals' return forecasting power. Using several performance measures of the aggregate accruals-based market-timing strategy, such as excess portfolio return, Sharpe ratio, and Jensen's alpha, we find robust evidence that, relative to the passive investment strategy of buying and holding the stock market, the market-timing strategy delivers superior performance that is both statistically and economically significant. Specifically, on average, the market-timing strategy beats the S&P500 index by 6 to 22 percentage points (annualized) after controlling for transaction costs over the 1980–2004 period.