Strategy profitability affected by academic papers following publication

Here’s an interesting thing: it seems that people actually read academic papers.

A paper published in October 2012, Does Academic Research Destroy Stock Return Predictability?, finds that the profitability of strategies declined by, on average, 35% after the studies had been published in academic journals.

The authors, R. David McLean and Jeffrey Pontiff, looked at 82 studies published in 68 different papers in journals such as Journal of Financial Economics and Journal of Political Economy. Their main findings are:

  1. The return predictability of the 82 studies suffered a 35% decay post-publication.
  2. Publication drew attention to the anomalies which led to increased trading in anomaly stocks.
  3. The above increase in trading was seen more in large, liquid stocks than smaller cap stocks.

The publication of this paper has resulted in some interesting discussion – and reporting. The Chronicle of Higher Education headlined their article “Academic Research Destroys Stock Values“, which isn’t what the paper is saying, but is certainly a more exciting heading than the best we could come up with for this blog post.

So, while text like-

Similar to Table 3, Table 7 estimates a regression akin to Eq. (1); only the dependent variable is the normalized rank of the trading characteristic, rather than the normalized return.

is not everyone’s beach-reading choice, someone is actually reading this stuff.

The ramifications of this study are interesting. At the more trivial end:

  • Academics finally have proof that, not only are people reading their papers, but they are also acting on the research. This might result in salary increases for the academics – which means they are being rewarded for research that, in some cases, is no longer useful. Perhaps the salary increase could be proportional to how little use the research is after publication?
  • Will the vailidity of the findings of this paper itself also decay 35% after publication? Perhaps the best anomalies will no longer be published in academic papers, leading to a 35% decay in the 35% figure.
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