The Persistence of the Small Firm/January Effect: Is it Consistent With Investors' Learning and Arbitrage Efforts?
Kathryn E. Easterday
Miami University Farmer School of Business
Pradyot K. Sen
University of Washington Bothell
University of Cincinnati - Department of Accounting
Quarterly Review of Economics and Finance, Forthcoming
Using improved methodology and an expanded research design, we examine whether the small firm/January effect (Keim 1983) is declining over time due to market efficiency. First, we find that January returns are smaller after 1963-1979, but have simply reverted to levels that existed before that time. Second, we show that the January effect is not limited to mature markets but also appears in firms trading on the relatively new NASDAQ exchange in the 1970s. Third, trading volume for small firms in December and January is not different from other months, implying that traders are not actively arbitraging the anomaly. Together, our results suggest that this anomaly continues to defy rational explanation in an efficient market.
Number of Pages in PDF File: 47
Keywords: January effect, market efficiency, arbitrage
JEL Classification: G12
Date posted: July 22, 2008
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