SIZE AND EARNINGYPRICE RATIO ANOMALIES: ONE EFFECT OR TWO? Thomas J. Cook, University of Denver Michael S. Rozeff, University of Iowa Two recent studies of asset pricing anomalies display an unusually sharp degree of contradiction. Reinganum (1981) argues that the size effect on returns effectively subsumes the earnings/price ratio effect, while Basu (1983) maintains that the earnings/price ratio effect subsumes the size effect. Are the size and earnings/price ratio effects manifestations of one anomaly or are they independent effects? Suspecting that the contradiction in the two studies results from methodological differences, we examine the issue anew using an array of experimental methods including those used in the earlier studies. The evidence strongly supports the hypothesis that equity returns are subject to at least two separate effects, including both size and earnings/price ratio. Reinganum's findings are shown to result from a fortuitous choice of experimental methods. By the process of elimi- nation, we conclude that Basu's finding of no size effect after controlling for earnings/price ratio is probably related to some peculiarity of data base or sample of stocks obtained from the data base.
The Financial Review – Wiley
Published: Jun 1, 1984
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