Dissecting Market Efficiency ∗

In this paper we introduce a new methodology to test market efficiency and to assess the performance of the most widely accepted asset pricing models. We use this methodology to test the semi-strong form of market efficiency in the context of publicly available accounting information. Instead of testing for a single accounting-based firm characteristic that can generate abnormal excess returns under a given asset pricing model, we simultaneously test a large set of public accounting information in the context of several asset pricing models. Our results cast considerable doubt on both the efficient markets hypothesis and the standard asset pricing models used to test that hypothesis. The evidence clearly suggests (a) that market inefficiency is not explained by a few known pricing anomalies but rather is a broad and general phenomena and (b) that standard asset pricing models fail to meet the minimum predictive requirements for such models. JEL classification: G12.