This paper examines the relationship between accrual components and stock trading costs in China and finds that both abnormal and normal accruals are associated with these costs. Moreover, negative accruals, both abnormal and normal, have a greater influence on stock trading costs than positive accruals because of short-selling constraints in the Chinese stock market. Further analysis reveals that investors who are fixated on accruals are unable to separate positive or negative abnormal accruals from earnings in general. Additionally, investors overestimate the persistence of both positive and negative normal accruals. These findings constitute further evidence of the low degree of market efficiency in China. Chinese investors seem to overestimate firm value when abnormal and normal accruals are positive and underestimate it when they are negative, thus leading to an asymmetric effect on trading costs between positive and negative accruals in the face of short-selling constraints in the Chinese stock market.
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