Institutional Investors, Analyst Following, and the January Anomaly

Lucy F. Ackert and George Athanassakos
Federal Reserve Bank of Atlanta
Working Paper 98-8
June 1998

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Studies have documented that average stock returns for small, low-stock-price firms are higher in January than for the rest of the year. Two explanations have received a great deal of attention: the tax-loss selling hypothesis and the gamesmanship hypothesis. This paper documents that seasonality in returns is not a phenomenon observed only for small firms' stock or those with low prices. Strong seasonality in excess returns is reported for a sample of widely followed firms. Sample firms have unusually low excess returns in January, and returns adjust upward over the remainder of the year. These results are consistent with the gamesmanship hypothesis but not the tax-loss-selling hypothesis. As financial institutions rebalance their portfolios in January to sell the stock of highly visible and low-risk firms, there is downward price pressure in January. In addition, the results suggest that firm visibility explains why seasonality in returns is related to firm size and stock price. Once we control for visibility, market value and uncertainty do not appear to be important determinants of seasonality.

JEL classification: G10

Key words: seasonality, gamesmanship

The authors thank Bryan Church, Marie Racine, and seminar participants at the University of Waterloo and Wilfrid Laurier University for helpful comments and John Grelck and Raman Krishnaprasad for research assistance. The views expressed here are those of the authors and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors' responsibility.

Please address questions regarding content to Lucy F. Ackert, Research Department, Federal Reserve Bank of Atlanta, 104 Marietta Street, NW, Atlanta, Georgia 30303-2713, 404/498-8783,; or George Athanassakos, The Mutual Group Financial Services Research Centre, School of Business and Economics, Wilfrid Laurier University, Waterloo, Ontario, Canada N2L 3C5, 519/884-0710 x2561,