Do Anomalies Exist Ex Ante?

Abstract

The anomalies literature in capital markets research is based (almost) exclusively on average realized returns. In contrast, we construct accounting-based expected returns for dollar neutral long-short trading strategies formed on a wide array of anomaly variables, including book-to-market, size, composite issuance, net stock issues, abnormal investment, asset growth, investment-to-assets, accruals, earnings surprises, failure probability, return on assets, and short-term prior returns. Our findings are striking. Except for the value and the size premiums, cost of equity estimates differ drastically from average realized returns. We provide economic interpretations based on both mispricing and measurement errors in expected returns.

Keywords: capital markets anomalies, expected return estimates, dividend discounting

JEL Classification: G12, G14