Michael S. Rozeff

Capital market seasonality: The case of stock returns

Abstract In this paper we present evidence on the existence of seasonality in monthly rates of return on the New York Stock Exchange from 1904–1974. With the exception of the 1929–1940 period, there are statistically significant differences in mean returns among months due primarily to large January returns. Dispersion measures reveal no consistent seasonal patterns and the characteristic exponent seems invariant among months. We also explore possible implications of the observed seasonality for the capital asset pricing model and other research.

Market Efficiency and Insider Trading: New Evidence

That corporate insiders earn profits from stock trading does not surprise most financial economists, but that outsiders can earn abnormal returns by using pub licly-available, insider-trading data constitutes a serious exception to stock-market efficiency. The authors show that this anomaly conti nues to exist despite the publication of studies attesting to its exi stence. They suggest that the anomalous profits to outsiders are a ma nifestation of the size and earnings/price ratio effects. Controlling for these factors reduces outsider profits by half: the additional a ssumption of a 2 percent transactions cost makes outsider profits zer o or negative. Insider profits, after an assumed 2 percent transactio ns cost, are a moderate 3 percent per annum for annual holding period s. Copyright 1988 by the University of Chicago.

Overreaction and Insider Trading: Evidence from Growth and Value Portfolios

Insider transactions are not random across growth and value stocks. We find that insider buying climbs as stocks change from growth to value categories. Insider buying also is greater after low stock returns, and lower after high stock returns. These findings are consistent with a version of overreaction which says that prices of value stocks tend to lie below fundamental values, and prices of growth stocks tend to lie above fundamental values. Copyright The American Finance Association 1998.

Dividend Yields Are Equity Risk Premiums

This article presents evidence that dividend yields are directly related to and predict future stock returns: The higher the yield, the higher the stock return. The paper uses the constant dividend growth model and the subsidiary Golden Rule of Accumulation view that real long-term growth equals the real rate of interest in order to show that the dividend yield is directly related to the risk premium. A predictive test shows that dividend yields provide superior predictions of equity risk premiums in terms of lower bias, lower mean square error and lower mean absolute error as compared with the method of using historical realized returns.

Univariate Time-Series Models of Quarterly Accounting Earnings per Share: A Proposed Model

In this article, we compare several candidate time-series models for the time-series of quarterly accounting earnings per share. One Box-Jenkins model dominates in terms of forecast accuracy. This model is a Box-Jenkins (1,0,0) x (0,1,1) model.

The Wealth Effects of Company Initiated Management Changes

The essence of corporate control includes the hiring and firing of key managers. We examine changes in equity values when the Board of Directors appoints and dismisses top-level managers. The evidence suggests that management changes signal shifts in company policy and raise shareholder wealth, internal promotions confirm the soundness of investment by large companies in firm-specific human capital while external appointments do not, promotions occur more often than external appointments but decline in importance as firm size decreases, and dismissal is not a favored means to handle managerial underperformance but is associated with stock price increases when used.

Money and stock prices: Market efficiency and the lag in effect of monetary policy

This paper examines stock market efficiency with respect to money supply data by testing (1) regression models of stock returns on monetary variables and (2) trading rules based on money supply data. The evidence indicates no meaningful lag in the effect of monetary policy on the stock market and that no profitable trading rules using past values of the money supply exist. Therefore this evidence is consistent with the efficient market model. Current security returns incorporate all information contained in past money supply data and, in addition, appear to anticipate future changes in the money supply. A number of previous studies have concluded that lags exist and can be used in profitable trading rules. Analysis of these studies demonstrates that for a variety of reasons the evidence in these past studies does not sustain such conclusions.

Size and Earnings/Price Ratio Anomalies: One Effect or Two?

Studies of size and earnings/price ratio effects together have produced contradictory results. Does one effect subsume the other or are there two separate effects? This paper demonstrates that equity returns are related to both size and earnings/price ratio as well as the month of January. Reinganum [20] and Basu [4] are reexamined to find the reasons for their contradictory results. Reinganums finding that size subsumes earnings/price ratio is caused by a fortuitous choice of methods. Basus finding that earnings/price ratio subsumes size appears to be sample-specific.

Long-Run Performance after Stock Splits: 1927 to 1996

We measure the postsplit performance of 12,747 stock splits from 1927 to 1996 using two methods to measure abnormal returns: size and book-to-market reference portfolios with bootstrapping, and calendar-time abnormal returns combined with factor models. Between 1927 and 1996, neither method applied to splits 25 percent or larger finds performance significantly different from zero. Over selected subperiods, subsamples of 2-1 splits restricted by book-to-market availability requirements display positive abnormal returns using some methods. However, these samples show small or negligible abnormal returns using the calendar-time method. Overall, the stock split evidence against market efficiency is neither pervasive nor compelling. Copyright 2003 by the American Finance Association.

Adaptive Expectations, Time-Series Models, and Analyst Forecast Revision

The process by which analysts revise quarterly earnings forecasts is analyzed and compared to the way in which several time-series models of quarterly earnings revise forecasts. A significant portion of the analysts forecast revision is explained by the most recent one-quarter-ahead forecast error. Analyst revisions are adaptive in the same manner that single-period ahead model forecasts are adaptive. At longer horizons, the evidence is that analysts revise forecasts in the same way that autoregressive models of quarterly earnings revise and not as moving average models do.