McGraw-Hill

Disentangling Equity Return Regularities 55
2. The week-of-the-month effect may relate to management's
proclivity-for announcing good earnings reports
quickly (generally during the first 2 weeks of a calendar
month) and sitting on bad reports longer.
3. Because companies long overdue for an earnings announce
ment may be delaying the release of bad news, there might
be a "late reporter" anomaly, whereby late announcements
are often negative and cause a price decline.
RETURN REGULARITIES WE CONSIDER
In this section, we describe briefly each return regularity consider
in this article. The method of constructing and normalizing each
measure is explained more fully in the next section.
Low P/€. It has been well documented that stocks with lower
price/earnings ratios tend to outperform those with higher
P/E ratios.' We used the reciprocal of P/E, E/P, measured as
the trailing year's fully diluted earnings divided by price.
This measure allowed us to accommodate negative and zero
earnings in a continuous fashion.
SmaIl size. Smaller size has a pronounced correlation with
future performance.8 We found, as did many previous
researchers, that the effect is roughly linear in the of log size.
Hence we used the negative of the natural log of market
capitalization.
Dividend yield. Because US. tax law has treated capital gains
more favorably than dividends, taxable investors may have
demanded a higher pretax return on higher-yielding stocks
to compensate for the increased tax liability. (Even under the
Tax Reform Act of 1986, taxes on capital gains are not taxed
until realized, although they no longer enjoy a preferential
rate.) Alternatively, investors may have a psychological
preference for cash dividends.' There are conflicting
empirical studies on these propositions.'o In addition, zeroyielding
stocks have been shown to have unusually high
returns, especially in January." We used a dividend-dividedby-price
measure, as well as a binary indicator of zero yield,
to model these relationships.