The Persistence of the Small Firm/January Effect: Is it Consistent With Investors' Learning and Arbitrage Efforts?

47 Pages Posted: 22 Jul 2008 Last revised: 11 Jun 2015

Kathryn E. Easterday

Wright State University

Pradyot K. Sen

University of Washington Bothell

Jens Stephan

University of Cincinnati - Department of Accounting

Date Written: June 1, 2008

Abstract

Using improved methodology and an expanded research design, we examine whether the small firm/January effect 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.

Keywords: January effect, market efficiency, arbitrage

JEL Classification: G12

Suggested Citation

Easterday, Kathryn E. and Sen, Pradyot K. and Stephan, Jens, The Persistence of the Small Firm/January Effect: Is it Consistent With Investors' Learning and Arbitrage Efforts? (June 1, 2008). Quarterly Review of Economics and Finance, 49(3): 1172-1193, 2009. Available at SSRN: https://ssrn.com/abstract=1166149

Kathryn E. Easterday (Contact Author)

Wright State University ( email )

3640 Col. Glenn Hwy
Dayton, OH Ohio 45435-0001
United States

Pradyot K. Sen

University of Washington Bothell ( email )

UWBB 104 E
Beardslee Bulevard
Bothell, WA 98011-8246
United States
425-352-5432 (Phone)

Jens Stephan

University of Cincinnati - Department of Accounting ( email )

Cincinnati, OH 45221-0211
United States

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