Accounting-Based Stock Price Anomalies: Separating Market Inefficiencies from Research Design Flaws

Abstract

We examine six stock price anomalies using two sets of tests to determine the extent to which six anomalies a) represent market mispricing, or b) reflect premia for unidentified risks. Market mispricing is indicated if the anomalous returns are concentrated around subsequent earnings announcements, in patterns suggesting that the earnings information causes traders to reexamine their prior (incorrect) beliefs. Mispricing is also indicated if anomalous returns on zero investment portfolios are positive, period after period. Our results indicate that an anomaly based on earnings surprises probably reflects market mispricing, but that the book/market ratio, earnings/price ratio, and two factors based on a computerized fundamental analysis (from Ou and Penman [1989] and Holthausen and Larcker [1992]) are more likely to reflect risk premia. Evidence on a sixth anomaly, based on announcement quarter abnormal returns, is mixed.

JEL Classification: G14, M41