Is the January effect rational? Insights from the accounting valuation model
Kathryn E. Easterday and
Pradyot K. Sen
The Quarterly Review of Economics and Finance, 2016, vol. 59, issue C, 168-185
Abstract:
Employing a permanent earnings valuation model and a novel sample partition, we find evidence that the January effect “anomaly” is consistent with rational economic market behavior. Investors in firms which experience January effect return premiums appear to discount first quarter earnings performance but reward permanent earnings and expectations of future improvements. Our evidence also supports a tax-loss selling explanation for the January effect. We find that the January effect is experienced by relatively few firms in the sample overall, but a substantial percentage of January effect firms are identified as potential tax-loss sellers. Our results complement prior research suggesting that the January effect is neither a result of irrational noise traders nor consistent with systemic risk factor explanations. Our study reconciles the assumption of arbitrage inherent in trading studies with a fundamental accounting valuation approach and offers some further insights into the nature of this market phenomenon.
Keywords: January effect; Permanent earnings; Tax-loss selling (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)
Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1062976915000575
Full text for ScienceDirect subscribers only
Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:eee:quaeco:v:59:y:2016:i:c:p:168-185
DOI: 10.1016/j.qref.2015.05.001
Access Statistics for this article
The Quarterly Review of Economics and Finance is currently edited by R. J. Arnould and J. E. Finnerty
More articles in The Quarterly Review of Economics and Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().