Can the Changes in Fundamentals Explain the Attenuation of Investment-Related Anomalies

57 Pages Posted: 24 Sep 2021

See all articles by Siu Kai Choy

Siu Kai Choy

King's College London

Craig M. Lewis

Vanderbilt University - Finance

Yongxian Tan

Curtin University

Date Written: April 15, 2020


The existing literature attributes the recent decay of stock market anomalies to increased arbitrage (e.g., Chordia, Subrahmanyam and Tong, 2014; Engelberg, McLean and Pontiff, 2016; Green, Hand and Zhang, 2016). In this paper, we present evidence that the apparent demise of several prominent classes of stock market anomalies is better explained by changes in underlying fundamentals. The differences in subsequent fundamental performance between the long- and short-leg portfolios, as measured by standardized seasonally differenced return on average assets (SDROA), decrease substantially after 2003 for the financing, investment and accruals anomalies we examine. We find that quarterly stock return can predict SDROAs up to four quarters ahead and that the decline in SDROA spreads is accompanied by a decline in the investment spreads between the long- and short-leg portfolios. These results are consistent with the q-theory of investment, which attributes the attenuation of these anomalies to time variation in discount rates. We provide evidence that the time variation in discount rates is associated with increased uncertainty. We also show that neither changes in analyst forecast errors nor proxies for increased arbitrage can explain the attenuation of these anomalies.

Keywords: Stock Market Anomalies; Q-Theory; Arbitrage; Uncertainty

JEL Classification: G00; G2; G14

Suggested Citation

Choy, Siu Kai and Lewis, Craig M. and Tan, Yongxian, Can the Changes in Fundamentals Explain the Attenuation of Investment-Related Anomalies (April 15, 2020). Available at SSRN: or

Siu Kai Choy

King's College London ( email )

Bush House, Kings Business School
30 Aldwych
London, WC2B 4BG
United Kingdom

Craig M. Lewis (Contact Author)

Vanderbilt University - Finance ( email )

401 21st Avenue South
Nashville, TN 37203
United States

Yongxian Tan

Curtin University ( email )

Kent Street
Perth, WA WA 6102

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