284 E.F.FamafJournal of Financial Economics 49 (1998)283-306 The assumption in studies that focus on short return windows is that any lag in the response of prices to an event is short-lived.There is a developing literature that challenges this assumption,arguing instead that stock prices adjust slowly to information,so one must examine returns over long horizons to get a full view of market inefficiency. If one accepts their stated conclusions,many of the recent studies on long- term returns suggest market inefficiency,specifically,long-term underreaction or overreaction to information.It is time,however,to ask whether this litera- ture,viewed as a whole,suggests that efficiency should be discarded.My answer is a solid no,for two reasons. First,an efficient market generates categories of events that individually suggest that prices over-react to information.But in an efficient market,appar- ent underreaction will be about as frequent as overreaction.If anomalies split randomly between underreaction and overreaction,they are consistent with market efficiency.We shall see that a roughly even split between apparent overreaction and underreaction is a good description of the menu of existing anomalies. Second,and more important,if the long-term return anomalies are so large they cannot be attributed to chance,then an even split between over-and underreaction is a pyrrhic victory for market efficiency.We shall find,however, that the long-term return anomalies are sensitive to methodology.They tend to become marginal or disappear when exposed to different models for expected (normal)returns or when different statistical approaches are used to measure them.Thus,even viewed one-by-one,most long-term return anomalies can reasonably be attributed to chance. A problem in developing an overall perspective on long-term return studies is that they rarely test a specific alternative to market efficiency.Instead,the alternative hypothesis is vague,market inefficiency.This is unacceptable.Like all models,market efficiency(the hypothesis that prices fully reflect available information)is a faulty description of price formation.Following the standard scientific rule,however,market efficiency can only be replaced by a better specific model of price formation,itself potentially rejectable by empirical tests. Any alternative model has a daunting task.It must specify biases in informa- tion processing that cause the same investors to under-react to some types of events and over-react to others.The alternative must also explain the range of observed results better than the simple market efficiency story;that is,the expected value of abnormal returns is zero,but chance generates deviations from zero (anomalies)in both directions. Since the anomalies literature has not settled on a specific alternative to market efficiency,to get the ball rolling,I assume reasonable alternatives must choose between overreaction or underreaction.Using this perspective,Section 2 reviews existing studies,without questioning their inferences.My conclusion is that,viewed as a whole,the long-term return literature does not identifyThe assumption in studies that focus on short return windows is that any lag in the response of prices to an event is short-lived. There is a developing literature that challenges this assumption, arguing instead that stock prices adjust slowly to information, so one must examine returns over long horizons to get a full view of market inefficiency. If one accepts their stated conclusions, many of the recent studies on long￾term returns suggest market inefficiency, specifically, long-term underreaction or overreaction to information. It is time, however, to ask whether this litera￾ture, viewed as a whole, suggests that efficiency should be discarded. My answer is a solid no, for two reasons. First, an efficient market generates categories of events that individually suggest that prices over-react to information. But in an efficient market, appar￾ent underreaction will be about as frequent as overreaction. If anomalies split randomly between underreaction and overreaction, they are consistent with market efficiency. We shall see that a roughly even split between apparent overreaction and underreaction is a good description of the menu of existing anomalies. Second, and more important, if the long-term return anomalies are so large they cannot be attributed to chance, then an even split between over- and underreaction is a pyrrhic victory for market efficiency. We shall find, however, that the long-term return anomalies are sensitive to methodology. They tend to become marginal or disappear when exposed to different models for expected (normal) returns or when different statistical approaches are used to measure them. Thus, even viewed one-by-one, most long-term return anomalies can reasonably be attributed to chance. A problem in developing an overall perspective on long-term return studies is that they rarely test a specific alternative to market efficiency. Instead, the alternative hypothesis is vague, market inefficiency. This is unacceptable. Like all models, market efficiency (the hypothesis that prices fully reflect available information) is a faulty description of price formation. Following the standard scientific rule, however, market efficiency can only be replaced by a better specific model of price formation, itself potentially rejectable by empirical tests. Any alternative model has a daunting task. It must specify biases in informa￾tion processing that cause the same investors to under-react to some types of events and over-react to others. The alternative must also explain the range of observed results better than the simple market efficiency story; that is, the expected value of abnormal returns is zero, but chance generates deviations from zero (anomalies) in both directions. Since the anomalies literature has not settled on a specific alternative to market efficiency, to get the ball rolling, I assume reasonable alternatives must choose between overreaction or underreaction. Using this perspective, Section 2 reviews existing studies, without questioning their inferences. My conclusion is that, viewed as a whole, the long-term return literature does not identify 284 E.F. Fama/Journal of Financial Economics 49 (1998) 283—306