The January Effect in Preferred Stock Investments
Journal article by Daniel E. Vetter, John R. Wingender; Quarterly Journal of Business and Economics, Vol. 35, 1996
Journal Article Excerpt
The January effect in preferred stock investments. by Daniel E. Vetter , John R. Wingender INTRODUCTION A January anomaly regularly has been detected in common stock returns, but it has not been investigated in preferred stock returns. Recent studies have tried to test whether or not the January effect is market dependent or financial asset dependent. For example, the January effect has been found in the common stock returns of many different countries, in certain bond series, and in the derivative securities of options and convertible bonds. Studying the behavior of the preferred stock market is important. First, the preferred equity market still plays an important role as a source of capital for U.S. corporations. Second, if evidence of seasonality is found in the preferred stock market, studies that examine the reasons for seasonality can focus on factors common to all markets. If seasonality is not found in the preferred stock market, then researchers can concentrate on factors unique to the other markets. Therefore, in this study we extend the investigation into the previously unexamined market of preferred stock. The following section reviews the literature on the January seasonal in various markets and financial assets. The sample is described. In assessing whether the January effect is present in preferred stock returns, both an index (Standard & Poor's preferred stock price index) and individual preferred stock returns are investigated. In the methodology section the tests for seasonality are presented, and the results document the substantial January seasonal in the two samples of preferred stock returns. PREVIOUS RESEARCH A pattern of returns for financial assets that is much higher in the month of January than in the other months of the year has been documented by many researchers. In a most readable account of the January effect, Haugen and Lakonishok (1988) recount the discovery of the common stock anomaly. Dyl (1977) and Rozeff and Kinney (1976), among others, detect abnormal returns in common stocks during the month of January. A satisfactory explanation for the January phenomenon has not been uncovered. One of the most examined explanations has been the tax effect Pettengill (1986), however, has found the January anomaly in U.S. common stock returns before income taxes were in effect. In addition, Gultekin and Gultekin (1983) have found the January seasonal in the stock returns of 13 industrial countries with various tax laws. Aggarwal, Hiraki, and Rao (1990) and Jaffe and Westerfield (1985) have found the January seasonal in Japan, while Aggarwal and Rivoli (1989) have found the existence of the January effect in common stock returns of emerging Asian markets. Although these studies consider the same financial asset (common stock), the various countries have different market structures that could confound the tax issues. Thus, it is unlikely that any tax explanation alone will be able to describe the January effect fully. Additional research into the January effect has indicated support for various other anomalies, such as the P/E, the dividend yield, the winners versus losers, and the size effects. The progression of research indicates that the January effect is driven by small companies. This fact would bias (e.g., Roll 1983) research on equally weighted indices toward finding a January effect. Thus, Lakonishok and Smidt (1988) did not find the January effect in theft 90 year study of the Dow Jones Industrial Average, a price-weighted index. Ritter and Chopra (1989) use a value-weighted index to study individual common stock return patterns and find that the January effect is mainly due to small and risky companies. Their findings suggest that portfolio balancing is a reasonable explanation for the January seasonal in common stock returns.On the other hand, studies investigating the January effect in other financial assets' returns where the size issue is ambiguous have found mixed seasonality results. Wilson and Jones (1990) suggest that neither the tax-loss selling nor portfolio rebalancing arguments adequately explain the seasonality in corporate bonds and commercial paper series. Schneeweis and Woolridge (1979) examine bond returns from corporate, public utility, municipal, and the ten year U.S. Treasury government bond indices. Jordan and Jordan (1991) investigate seasonalities in corporate bond indices. Smirlock (1985) also investigates a long-term government bond series, as well as long-term corporate bonds of high and low quality. Chang and Pinegar (1986) examine individual bond return data. While these bond studies have not yielded consistent findings, they do find that the January seasonal is most pronounced in more risky bonds. Mann and Solberg (1989) find a link between the default premium for corporate bonds and seasonality. ... |
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