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

Posted: 4 Aug 1998

See all articles by Victor Bernard

Victor Bernard

University of Michigan at Ann Arbor

Jacob K. Thomas

Yale School of Management

James Michael Wahlen

Indiana University - Kelley School of Business - Department of Accounting

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

Suggested Citation

Bernard (deceased), Victor and Thomas, Jacob Kandathil and Wahlen, James Michael, Accounting-Based Stock Price Anomalies: Separating Market Inefficiencies from Research Design Flaws. Available at SSRN: https://ssrn.com/abstract=112328

Victor Bernard (deceased)

University of Michigan at Ann Arbor

N/A

Jacob Kandathil Thomas (Contact Author)

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

James Michael Wahlen

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States
812-855-2658 (Phone)
812-855-8679 (Fax)

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