Chapter 5

Fundamental Data Anomalies

Ian Gow

As discussed in Chapter 1, a key tenet of the efficient markets hypothesis (EMH) is that the value implications of financial statement information should be fully impounded into stock prices. As such, analysis of such “fundamental” information should not provide the analyst with the opportunity to earn excess returns or “beat the market.” The EMH was a maintained hypothesis in accounting and finance research for several decades; evidence of the historical firmness of the belief in EMH among many researchers is given by the use of the term anomaly to describe any apparent departure from market efficiency. However, by the turn of the millennium, a growing body of evidence of a variety of anomalies had developed, making it difficult to maintain an unequivocal belief in its validity.

Much of the evidence that has shaken faith in the EMH relates to fundamental data. Foster, Olsen, and Shevlin (1984) and Bernard and Thomas (1989) provide evidence of post-earnings announcement drift, which refers to the apparent tendency of stock prices to continue to move in the direction of the earnings surprise for months after an earnings announcement. Sloan (1996) documents the accrual anomaly. Fama and French (1992) document several anomalies related to measures of fundamental value, such as earnings-to-price and book-to-market ratios. Each of these anomalies (or groups of anomalies) is sufficiently important to warrant a separate chapter in this volume. ...

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