Abstract
This paper uncovers several new empirical regularities in the historical returns of small stocks. First, within the sample of firms that have low market capitalizations, stocks with low past profitability (laggers) bring returns significantly higher than those of stocks with high past profitability (leaders). Second, the well-documented size premium (i.e., the risk-adjusted returns to small stocks) 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.
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