Salience Theory and the Cross-Section of Stock Returns: International and Further Evidence

Abstract

Motivated by existing evidence of the salience theory (ST) effect in the United States, we investigate its importance in 49 countries over the past three decades. Initial results suggest a negative relationship between the ST measure and future returns. The underperformance of low ST stocks is the strongest in countries with high idiosyncratic risk. However, the salience effect has three vital limitations. First, a substantial part of the anomaly can be attributed to the short-term return reversal. Second, it is priced primarily among microcaps. Third, the premium is realized predominantly following severe down markets and volatility spikes. Outside of microcaps and extreme market conditions, the salience effect does not exist.