The January effect: an examination of accounting earnings, other value relevant information, and tax-loss selling

• In Event: Financial Accounting and Reporting I

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 not a result of irrational “noise” traders, nor is it consistent with systemic risk factor explanations. Our study reconciles the assumption of arbitrage inherent in trading studies with a fundamental valuation approach and offers some further insights into the nature of this market phenomenon.

Authors

• Kathryn E. Easterday, Wright State University

• Pradyot K Sen, University of Washington Bothell