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The disappearing abnormal returns to a fundamental signal strategy

John Dorey (John Hancock Financial Services, Boston, Massachusetts, USA)
Sangwan Kim (Accounting and Finance Department, University of Massachusetts Boston, Boston, Massachusetts, USA)
Yong-Chul Shin (Accounting and Finance Department, University of Massachusetts Boston, Boston, Massachusetts, USA)

Managerial Finance

ISSN: 0307-4358

Article publication date: 10 April 2017

548

Abstract

Purpose

The purpose of this paper is to examine whether abnormal returns to a fundamental signal (FS) strategy disappear after the publication of Abarbanell and Bushee (1998).

Design/methodology/approach

Using data on NYSE/AMEX firms from 1974 to 2012, this research estimates annual Fama and MacBeth (1973) cross-sectional regression of risk-adjusted buy-and-hold returns on the FSs after controlling for contemporaneous earnings changes and a proxy for market risk.

Findings

This paper finds that predictable hedge returns to the FSs substantially decrease and become statistically insignificant after the Abarbanell and Bushee’s publication date. This research also finds that the FSs have not lost their importance to equity valuation process; value relevance of the FSs has not diminished, and the FSs have retained their predictive ability over time. The evidence on changing information and trading environments appears to contribute to the disappearing abnormal returns to a FS strategy.

Originality/value

This paper adds to the growing body of literature on the persistence of pricing anomalies.

Keywords

Acknowledgements

The authors thank Don Johnson (Editor), two anonymous referees, and Atreya Chakraborty for their helpful comments and suggestions. This paper is in part developed from John Dorey's Master thesis (entitled “Investor learning and the abnormal returns to a fundamental signal strategy”) completed at the University of Massachusetts Boston.

Citation

Dorey, J., Kim, S. and Shin, Y.-C. (2017), "The disappearing abnormal returns to a fundamental signal strategy", Managerial Finance, Vol. 43 No. 4, pp. 406-424. https://doi.org/10.1108/MF-05-2016-0142

Publisher

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Emerald Publishing Limited

Copyright © 2017, Emerald Publishing Limited

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