Analysis of broad samples of value-weighted and equal-weighted returns of U.S.
equities documents that abnormally high rates of return on small-capitalization
stocks continue to be observed during the month of January. This January effect
in small-cap stock returns is remarkably consistent over time and does not
appear to have been affected by passage of the Tax Reform Act of 1986. This
finding brings new perspective to the tax-loss selling hypothesis and suggests
that behavioral explanations are relevant to the January effect. After a
generation of intensive study, the January effect continues to present a serious
challenge to the efficient market hypothesis.