Do Five Asset Pricing Anomalies Share a Common Mispricing Factor? Multifaceted Empirical Analyses of Failure Risk Proxies, External Financing, and Stock Returns

Assuming that risk premiums are determined by failure risk, we present a stylized model of interactions among risk-proxy variables, external financing, and stock returns in which a common mispricing factor, involving operating profit and external financing, drives the following five asset pricing anomalies: (1) the failure-risk anomaly; (2) earnings momentum; (3) the external financing anomaly; (4) the accruals anomaly; and (5) the book-to-market anomaly. We test the model using panel data on 205 portfolios of U.S. firms (1974-2008). Results for several methodologies all indicate that stock returns are driven by one rational factor, firm size, and one mispricing factor common to anomalies (1), (2), (3), (5) and, to a lesser extent, (4). The common mispricing factor fades with futurity and has strong seasonality