Turn-of-Month Evaluations of Liquid Profits and Stock Returns: A Common Explanation for the Monthly and January Effects



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    • School of Management, State University of New York at Buffalo. I am grateful to participants in the finance workshops at Arizona State University and SUNY-Buffalo, especially Richard Smith, James Booth, Marie Sushka, Michael Hertzel, Frank Jen, Philip Perry, and Chuck Trzcinka, and to Robert Haugen, David Ketcham, Josef Lakonishok, an anonymous referee, and editor René Stulz for helpful comments on earlier drafts of this paper. Any remaining errors are, of course, my responsibility.


This paper presents and tests a hypothesis that the standardization of payments in the United States at the turn of each calendar month generally induces a surge in stock returns at the turn of each calendar month. The hypothesis also asserts that returns generally will be greater following the month of December and will vary inversely with the stringency of monetary policy. Empirical results using stock index returns for 1969–1986 support the hypothesis. This analysis provides an explanation for the previously documented monthly effect in stock returns and a partial explanation for the January effect.