The January effect is primarily a low‐share price effect and less so a market value effect. In the recent 1977–1986 period, after‐transaction‐cost raw and excess January returns are lower on low‐price stocks than on high‐price stocks. Failure of informed traders to eliminate significantly large before‐transaction‐cost excess January returns on low‐price stocks is potentially explained by higher transaction costs and a bid‐ask bias. At the least, the January anomaly found in prior tests is not persistent, and thereby, not likely to be exploitable by typical investors.

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Significant firm-size-related differences in abnormal returns and systematic risks occur in bull and bear market months from 1926 to 1988. Potential differential return premiums between recessions and expansions appear to be captured by the varying risk model and not the constant risk model. Using a dual-beta market model to adjust for risk differences in bull and bear markets, we find that large firm stocks on average earn significant positive excess returns and small firm stocks earn significant negative excess returns. Superior performance of large firm stocks is even more pronounced outside January.

JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org. ABSTRACTThe January effect is primarily a low-share price effect and less so a market value effect. In the recent 1977-1986 period, after-transaction-cost raw and excess January returns are lower on low-price stocks than on high-price stocks. Failure of informed traders to eliminate significantly large before-transaction-cost excess January returns on low-price stocks is potentially explained by higher transaction costs and a bid-ask bias. At the least, the January anomaly found in prior tests is not persistent, and thereby, not likely to be exploitable by typical investors. NUMEROUS AUTHORS PROVIDE EVIDENCE supporting the view that the Januaryanomaly is a firm size phenomenon. However, indirect evidence also exists that share price may dominate firm size in explaining the January anomaly. For example, Jaffe, Keim, and Westerfield (1989) still find share price significant in explaining abnormal January returns after control for firm size. Kross (1985) concludes that the size effect is primarily a price effect. Transaction costs, degree of neglect, misassessment of risk, and infrequent trading have been shown to partially explain the positive abnormal returns on small firms stocks. These characteristics are equally, if not more, applicable to low-price stocks. The price effect explanation of the January anomaly may be consistent with the tax-loss-selling and the gamesmanship hypotheses. Both hypotheses predict a turn-of-the-year effect resulting in high January returns for depressed stocks, which are potentially dominated by lowprice stocks. Furthermore, evidence of a positive turn-of-the-year bid-ask effect in returns of low-price stocks has also been suggested to overestimate the January anomaly. Despite all this suggestive evidence supporting a possible price effect explanation of the January anomaly, no direct evidence is available to answer the empirical question on whether the January anomaly is more dissipated with control for a price effect than control for a firm size effect.This paper documents that low share price stocks earn abnormal returns in January before transaction costs. This effect appears to be stable over time * Bhardwaj is from Winthrop College and Brooks is from the University of South Carolina. The authors wish to thank Scott Harrington, Edward Miller, William Moore, Rodney Roenfeldt, Ronald Rogers, Ren6 Stulz (editor) and an anonymous reviewer for helpful comments. We are grateful to the College of Business Administration at the University of South Carolina for its financial support. 553 This content downloaded from 139.184.14.159 on Tue, 29 Sep 2015 09:00:45 UTC All use subject to JSTOR Terms and Conditions 554The Journal of Finance and to subsume the re...

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