Which Firms are Responsible for Characteristic Anomalies? A Statistical Leverage Analysis

Abstract

We conduct a comprehensive analysis of the rationales proposed in prior studies to explain several well-known characteristic anomalies. Recognizing that only a minority of firms drive these anomalies, we run a statistical leverage analysis to filter out these firms. We then try to forecast the identity of these ‘high leverage firms’ using proxy variables related to the rationales. Our results indicate that traditionally-used risk factors hardly ever explain the anomalies, while idiosyncratic risk together with distress risk is of great importance for the size and the book-to-market anomalies. In contrast, no rationale seems entirely convincing in explaining the momentum anomaly.

Keywords: Characteristic anomalies, statistical leverage analysis, efficient markets

JEL Classification: G11, G12, G15