While many researchers have documented a pronounced seasonality in stock returns-with January having significantly higher returns than the rest of the year-a theory of why the January effect exists has yet to be universally accepted. Examination of the impact of systematic shifts in the portfolio holdings of individual and institutional investors provides insights into the seasonal behavior of stock prices.

The evidence from the aggregate Canadian stock market and from five size sorted portfolios in Canada over the 1978-89 period shows that institutional trading actively influences stock price changes. In particular, portfolio rebalancing on the part of professional fund managers, prompted by conflict-of-interest considerations, causes stock prices to be bid up in January.