Abstract
This paper uncovers several empirical regularities in the returns of small stocks. First, within the sample of firms that have low market capitalisations, stocks with low past profitability ('laggers') bring returns that are significantly higher than those of stocks with high past profitability ('leaders'). Second, the size premium is generated largely by small laggers. Moreover, both patterns are particularly pronounced at earnings-announcement dates, suggesting that unexpected earnings growth can explain a portion of the abnormal returns to small stocks. Since these findings point to market inefficiency, they are especially important for the revenue management of money managers who invest in small stocks.
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