Using improved methodology and an expanded research design, we examine whether the small firm/January effect is declining over time due to market efficiency. First,we find that January returns are smaller after 1963ndash;1979, but have simply reverted to levels that existed before that time....

Employing a permanent earnings valuation model and a novel sample partition, we find evidence that the January effect “anomaly” is consistent with rational economic market behavior. Investors in firms which experience January effect return premiums appear to discount first quarter earnings...