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Fundamental strength and short-term return reversal

Author

Listed:
  • Zhu, Zhaobo
  • Sun, Licheng
  • Chen, Min

Abstract

We document that the fundamental strength (FSCORE) of a firm exerts a significant influence on the performance of short-term reversal strategies. Past losers with strong fundamentals significantly outperform past winners with weak fundamentals. Our FSCORE approach is complementary to Da et al. (2014) cash flow news metrics based on analysts’ forecast revisions in that many firms do not have analyst following. Our approach also seems capable of capturing the lagged effects from past fundamental news shocks. After controlling for fundamental strength, we find that investor sentiment plays a more dominant role than do liquidity shocks in explaining return reversal.

Suggested Citation

  • Zhu, Zhaobo & Sun, Licheng & Chen, Min, 2019. "Fundamental strength and short-term return reversal," Journal of Empirical Finance, Elsevier, vol. 52(C), pages 22-39.
    • Handle: RePEc:eee:empfin:v:52:y:2019:i:c:p:22-39
    DOI: 10.1016/j.jempfin.2019.02.006
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    Citations

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    Cited by:

    1. Eero J. Pätäri & Timo H. Leivo & Sheraz Ahmed, 2022. "Can the FSCORE add value to anomaly-based portfolios? A reality check in the German stock market," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 36(3), pages 321-367, September.
    2. Zhu, Zhaobo & Ding, Wenjie & Jin, Yi & Shen, Dehua, 2023. "Dissecting the idiosyncratic volatility puzzle: A fundamental analysis approach," Research in International Business and Finance, Elsevier, vol. 66(C).
    3. Gang Chu & John W. Goodell & Dehua Shen & Yongjie Zhang, 2022. "Machine learning to establish proxies for investor attention: evidence of improved stock-return prediction," Annals of Operations Research, Springer, vol. 318(1), pages 103-128, November.
    4. repec:hal:journl:hal-04691597 is not listed on IDEAS
    5. Li, Yan & Huo, Jiale & Xu, Yongan & Liang, Chao, 2023. "Belief-based momentum indicator and stock market return predictability," Research in International Business and Finance, Elsevier, vol. 64(C).
    6. Zhu, Zhaobo & Sun, Licheng & Yung, Kenneth, 2020. "Fundamental strength strategy: The role of investor sentiment versus limits to arbitrage," International Review of Financial Analysis, Elsevier, vol. 71(C).

    More about this item

    Keywords

    Short-term return reversal; Fundamental strength; Analyst forecast revision; Slow incorporation of information;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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