Post-Fundamentals Price Drift in Capital Markets: A Regression Regularization Perspective

Abstract

Regression regularization techniques show that deviations of accounting fundamentals from their preceding moving averages forecast drifts in equity market prices. The deviations-based predictability survives a comprehensive set of prominent anomalies. The profitability applies strongly to the long-leg and survives value-weighting and excluding microcaps. We provide evidence that the predictability arises because investors anchor to recent means of fundamentals.
A factor based on our fundamentals-based index yields economically significant intercepts after controlling for a comprehensive set of other factors, including those based on profit margins and earnings drift.

JEL Classification: G12, G14