The disappearing abnormal returns to a fundamental signal strategy

Purpose: The purpose of this paper is to examine whether abnormal returns to a fundamental signal (FS) strategy disappear after the publication of Abarbanell and Bushee (1998). Design/methodology/approach: Using data on NYSE/AMEX firms from 1974 to 2012, this research estimates annual Fama and MacBeth (1973) cross-sectional regression of risk-adjusted buy-and-hold returns on the FSs after controlling for contemporaneous earnings changes and a proxy for market risk. Findings: This paper finds that predictable hedge returns to the FSs substantially decrease and become statistically insignificant after the Abarbanell and Bushee’s publication date. This research also finds that the FSs have not lost their importance to equity valuation process; value relevance of the FSs has not diminished, and the FSs have retained their predictive ability over time. The evidence on changing information and trading environments appears to contribute to the disappearing abnormal returns to a FS strategy. Originality/value: This paper adds to the growing body of literature on the persistence of pricing anomalies.