‘Smart’ Money Blunts Mispricing

A large body of evidence demonstrates the persistence of numerous anomalies in stock prices, which suggests they can depart from fundamentals for periods of time. The anomalies include:

• Failure Probability: Stocks with a high probability of failure have lower future returns.
• O-score: Stocks with higher O-scores (a higher probability of bankruptcy) have lower future returns compared with stocks with lower scores.
• Net Stock Issuances: The stocks of firms that issue equity underperform the stocks of nonissuers.

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