Anchoring on Past Fundamentals
73 Pages Posted: 27 Jan 2020 Last revised: 10 Feb 2020
Date Written: January 8, 2020
Deviations of accounting fundamentals from their preceding means strongly predict future equity returns in the cross-section. Comprehensive measures based on such deviations yield annualized alphas that generally exceed 15% (6%) for equal- (value-) weighted portfolios. The return predictability goes beyond momentum, 52-week highs, profitability, and other prominent anomalies. The deviation-based investment profitability applies strongly to the long-leg and survives value weighting and excluding microcaps, unlike for other well-known return predictors. We provide evidence that the predictability arises because investors underreact to deviations from prevailing fundamental anchors.
JEL Classification: G12, G14
Suggested Citation: Suggested Citation