The reason for January Effect is that, in order to reduce tax liabilities, traders and investors sell their loser securities in December and create capital losses which they offset with the capital gain to reduce the tax liabilities. It was observed that these loser securities were generally small cap stocks, hence the name "Small Firm in January Effect"
Due to the excessive selling of shares in December, the stock prices are depressed, and than investors purchase it again in early part of January month at relatively attractive prices. This demand drives the stock prices up again, creating an abnormal return for the stocks.
Some of the Portfolio managers also do window dressing to their portfolio, there by creating January Effect. Portfolio managers have to prepare and report their portfolio holding as of 31st December. Portfolio managers sell riskier holdings before 31st December, just to make their portfolio appear less riskier on Annual Report, and later on purchase the riskier securities again in an expectation to earn higher returns.
Most common Calendar Based Anomalies and there interpretation are as follows:
My view is, if any of these anomalies could ever exist in market, than it will be soon eliminated by arbitragers. But keep an eye for these anomalies. Market always take you by surprise and who knows, when you get a chance to earn abnormal returns.