Stock returns, Stock return measure, Raw returns, Residual returns

Efficient market research arose in response to allegations from the professional investment community and critics of financial accounting, and it preceded a formal, conceptual development of market efficiency. Several ambiguities exist with respect to previous definitions of market efficiency. Market efficiency is defined here in terms of the equality of security prices under two information configurations (i.e., with and without universal access to the information system of interest). Casually, a securities market is efficient with respect to an information system if and only if security prices act as if everyone knows that information system. If this condition holds, prices are said to "fully reflect" the .information system. Several attributes of this definition are advantageous, relative to those, of earlier definitions.

Portfolios are formed directly and exclusively upon residual return behavior in the months prior to portfolio formation. The empirical behavior of residual return in the post-formation period is then examined. Based upon the overall time period studied (1932 through 1977), the average residual return is essentially zero in the months subsequent to the portfolio formation. However, systematic (i.e., non-zero) residual behavior is observed in particular years. Moreover, the results suggest the possibility that ‘abnormal’ returns observed after certain events (e.g., earnings announcements) may at least in part reflect more general phenomena associated with being ‘winners’ and ‘losers’ in terms of residual returns in the months previous to the event.