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

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