Accounting-Based Stock Price Anomalies: Separating Market Inefficiencies from Risk

Posted: 20 Dec 1996

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 accounting-based stock price anomalies using two sets of tests to determine the extent to which the 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 momentum probably reflects market mispricing, but that two value/glamour anomalies (based on the book/market ratio and the earnings/price ratio), and two anomalies based on computerized fundamental analyses (from Ou and Penman 1989 and Holthausen and Larcker 1992) are more likely to reflect risk premia than indicated by prior research. Evidence on a sixth anomaly, based on price momentum, 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 Risk. CONTEMPORARY ACCOUNTING RESEARCH, Vol 14, No 2, Summer 1997. Available at SSRN: https://ssrn.com/abstract=2842

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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