While event studies of s is consistent with the EMH (Fama, Fisher, Jensen, and Roll, 1969), other empirical analyses have found problems with the efficient-market hypothesis. Early examples include the observation that small neglected stocks and stocks with low book-market ratios (value stocks) tended to achieve abnormally high returns relative to what could be explained by the . Further tests of portfolio efficiency by Gibbons, Ross and Shanken (1989) (GJR) led to rejections of the CAPM, although tests of efficiency inevitably run into the joint hypothesis problem (see, ).
One of the reasons for this state of affairs is the fact that the EMH, by itself, is not a well-defined and empirically refutable hypothesis. To make it operational, one must specify additional structure, e.g. investors' preferences, information structure. But then a test of the EMH becomes a test of several auxiliary hypotheses as well, and a rejection of such a joint hypothesis tells us little about which aspect of the joint hypothesis is inconsistent with the data. Are stock prices too volatile because markets are inefficient, or is it due to risk aversion, or dividend smoothing? All three inferences are consistent with the data. Moreover, new statistical tests designed to distinguish among them will no doubt require auxiliary hypotheses of their own which, in turn, may be questioned."
Lo in Lo (1997), page