THE JOURNAL OF FINANCE • VOL. LXIII, NO. 4 • AUGUST 2008
EUGENE F. FAMA and KENNETH R. FRENCH∗ ABSTRACT
The anomalous returns associated with net stock issues, accruals, and momentum are pervasive; they show up in all size groups (micro, small, and big) in cross-section regressions, and they are also strong in sorts, at least in the extremes. The asset growth and profitability anomalies are less robust. There is an asset growth anomaly in average returns on microcaps and small stocks, but it is absent for big stocks. Among profitable firms, higher profitability tends to be associated with abnormally high returns, but there is little evidence that unprofitable firms have unusually low returns.
THERE ARE PATTERNS IN AVERAGE stock returns that are considered anomalies because they are not explained by the Capital Asset Pricing Model (CAPM) of Sharpe (1964) and Lintner (1965). For example, Banz (1981) finds that stocks with low market capitalization (small stocks) have abnormally high average returns. Stocks with high ratios of book value to the market value of equity also have unusually high average returns (Rosenberg, Reid, and Lanstein (1985), Chan, Hamao, and Lakonishok (1991), Fama and French (1992)). Haugen and Baker (1996) and Cohen, Gompers, and Vuolteenaho (2002) find that more profitable firms have higher average stock returns, while Fairfield, Whisenant, and Yohn (2003) and Titman, Wei, and Xie (2004) show that firms that invest more have lower stock returns. A literature initiated by Sloan (1996) finds that higher accruals predict lower stock returns. Pulling together earlier evidence that returns after stock repurchases are high (Ikenberry, Lakonishok, and Vermaelen (1995)) and returns after stock issues are low (Loughran and Ritter (1995)), Daniel and Titman (2006) and Pontiff and Woodgate (2008) show that there is a negative