Salient to Investors:

Researchers Zhiwu Chen and Jan Jindra conclude:

  • Small-cap stocks exhibit the sharpest decline in valuation from June to December and the highest rise from December to January.
  • For most months, small-cap stocks have the lowest valuation among all size groups and are the hardest to value.
  • Large stocks posses the highest valuation uniformity and are the least subject to valuation seasonality.
  • Recent losers tend to experience fortune reversals in January. Recent winners tend to continue and expand their fortunes in December.
  • Stocks reach their highest valuation in the May-June period. Stocks on average become less favorably valued as the year-end approaches. In December, stocks are the least favorably valued. The correction process of December’s low valuation starts in mid-December, accelerates in early January, and ends by March, after which point stocks tend to begin an overvaluation season of the year.
  • As year-end approaches, stocks that are beaten down and under-valued become even more undervalued, while stocks that are already overvalued will grow more overvalued. Due to performance-chasing at year-end by portfolio managers and to tax-loss selling. After the turn of the year, all of these valuation trends are reversed.
  • For most calendar months, small-cap stocks are on average the least favorably valued, followed by mid-cap and then by large-cap stocks.
  • Seasonal valuation patterns are the most severe for small-cap, in terms of changes both around year-end and from year-end to mid-year.
  • Small-cap stocks may simply be much harder to value and their mispricing more difficult to arbitrage away.  Arbitraging is more risky to do among small-cap than among large-cap stocks.
  • Small-cap firms show the strongest valuation variations both from mid-year to year-end and around the turn of the year, while large-cap stocks show the least.
  • The January effect is largely due to small-cap firms. Small-cap stocks have the lowest valuation in December and show the strongest January effect. The more underpriced a stock in mid December and/or the smaller the firm, the higher its return over the next month.
  • Large-cap stocks show little seasonal variations in valuation and return seasonality
  • Less information is available about small firms, and it is economically not meaningful for large institutional portfolio managers to invest in small firms.
  • Stocks are on average the most favorably priced before year-end and the least favorably priced in mid-year.
  • For small-cap stocks, the valuation seasonality is by far the strongest and the January valuation correction is also the sharpest. For most of the year, small-cap stocks are the least favorably valued with the widest valuation dispersion, while large-cap stocks are the most favorably priced with the lowest dispersion.

Read the full study at