Cash Balances and the January Effect in Stock Returns
Journal article by Dan W. French, Teresa D. Trapani; Quarterly Journal of Business and Economics, Vol. 33, 1994
Journal Article Excerpt
Cash balances and the January effect in stock returns. by Dan W. French , Teresa D. Trapani INTRODUCTION Rozeff and Kinney's (1976) finding that mean stock returns in January are higher than for other months has stimulated further research on January returns. These subsequent studies attribute this January effect to the concentration of high January returns in the issues of smaller companies (Banz, 1981; Keim, 1983; Blume and Stambaugh, 1983; and Ritter and Chopra, 1989). Roll (1983), observing that most of the high returns occur during the first few days in January, calls this phenomenon the turn-of-the-year effect. Of the various explanations for the turn-of-the-year effect, the tax-loss selling hypothesis (Reinganum, 1983; and Roll, 1983) in conjunction with Ritter's (1988) parking-the-proceeds hypothesis appear to be the most promising. The tax-loss selling hypothesis provides a plausible justification for investor selling behavior at year end, stating that investors sell stocks in order to realize the losses for tax purposes. The parking-the-proceeds hypothesis states that the buying and selling behavior of individual investors causes the turn-of-the-year effect. The parking-the-proceeds hypothesis theorizes that as the end of December approaches, investors tend to sell securities but not reinvest the entire proceeds immediately. Over year's end, the investors park the proceeds in anticipation of reinvesting the funds from December's sales during the month of January. The tendency of individual investors to concentrate their purchases in stocks of smaller companies produces relatively more buying pressure on the smaller stocks and hence their rise in price. Ritter identifies the tax-loss selling hypothesis as t... |
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