Working Paper: NBER ID: w15950
Authors: Jin Ginger Wu; Lu Zhang
Abstract: We construct accounting-based costs of equity for dollar neutral long-short trading strategies formed on a comprehensive list of anomaly variables. These variables include book-to-market, size, composite issuance, net stock issues, abnormal investment, asset growth, investment-to-assets, accruals, earnings surprises, failure probability, return on assets, and short-term prior returns. Our findings are striking. Except for the value premium, cost of equity estimates differ dramatically from average realized returns. If accounting-based costs of equity are reasonable proxies for expected returns, the evidence implies that returns of most anomalies are unexpected, and that mispricing, not risk, is the main driving force of capital markets anomalies.
Keywords: capital markets anomalies; expected return estimates; mispricing; risk
JEL Codes: G1; G12; G14; M41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| mispricing (D49) | capital market anomalies (G14) |
| risk (D81) | capital market anomalies (G14) |
| expected returns (G17) | realized returns (G19) |
| mispricing (D49) | unexpected returns (C59) |
| high-minus-low quintiles (on various anomaly measures) (C21) | negative average realized returns (G12) |
| high-minus-low quintile (on earnings surprises) (D80) | significantly higher average returns (G11) |
| value premium (D46) | expected returns closely align with average returns (G17) |