The Pricing of Firms with Expected Losses/Profits: The Role of January

28 Pages Posted: 7 May 2018

See all articles by Peng‐Chia Chiu

Peng‐Chia Chiu

The Chinese University of Hong Kong (CUHK)

Alexander Nekrasov

University of Illinois Chicago

Terry J. Shevlin

University of California-Irvine

Date Written: May/June 2018

Abstract

We examine the role of January in the relation between expected losses/profits and future stock returns. We predict and find that the relation between expected losses/profits and future returns reverses from the usual positive relation in non‐January months to a negative one in January. The reverse January relation is consistent across sample years, is observed in the United States and international markets, and is incremental to other variables associated with January returns. At least part of the reverse January relation is explained by tax‐loss selling. Further analysis shows that the reverse January relation results in a temporary price drift away from fundamental value. In other words, we find that abnormal positive (negative) future returns do not always indicate past under(over)valuation. Overall, our results illustrate the importance of controlling for the effect of January when examining how investors price expected losses/profits.

Keywords: expected losses/profits, January effect, return predictability, tax‐loss selling

Suggested Citation

Chiu, Peng‐Chia and Nekrasov, Alexander and Shevlin, Terry J., The Pricing of Firms with Expected Losses/Profits: The Role of January (May/June 2018). Journal of Business Finance & Accounting, Vol. 45, Issue 5-6, pp. 544-571, 2018, Available at SSRN: https://ssrn.com/abstract=3173363 or http://dx.doi.org/10.1111/jbfa.12296

Peng‐Chia Chiu (Contact Author)

The Chinese University of Hong Kong (CUHK)

Shatin, N.T.
Hong Kong
Hong Kong

Alexander Nekrasov

University of Illinois Chicago ( email )

1200 W Harrison St
Chicago, IL 60607
United States

HOME PAGE: http://business.uic.edu/profiles/alexander-nekrasov/

Terry J. Shevlin

University of California-Irvine ( email )

Paul Merage School of Business
Irvine, CA California 92697-3125
United States
2065509891 (Phone)

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