The value premium and the January effect

Abstract

PurposeThe purpose of this paper is to investigate the seasonal effect in the value premium puzzle. It studies whether the book‐to‐market effect is an outcome of the January effect observed among stock returns.Design/methodology/approachThe paper uses returns of portfolios based on size and BE/ME ratios as Fama and French suggest to define value premium and investigate the seasonality of the BE/ME effect. The paper tests whether the value premiums observed among large and small stocks are different in January and non‐January months. It examines the turn‐of‐the‐year effect on the value premium by analyzing the returns of BE/ME portfolios during the first and last ten trading days of a calendar year.FindingsEmpirical evidence supports the fact that value premium has different patterns in January and non‐January months for large and small capitalization firms. It was found that large stocks have a significant value premium only in January and this high January value premium among large stocks is mainly driven by loser stocks at the turn of the year. In contrast with large stocks, the value premium of small stocks occurs only in non‐January months.Originality/valueThis paper shows that value premium of large and small stocks are different in January and non‐January months. Furthermore, the past performance of stocks plays a key role in the observed January value premium among large stocks. Finally, this study provides evidence to show that the value premium among large stocks may be explained by investor trading behavior.