Funding Conditions and the Long-Run Reversal in Stock Returns

45 Pages Posted: 18 Mar 2011 Last revised: 20 Dec 2011

See all articles by Luis García-Feijóo

Luis García-Feijóo

Florida Atlantic University - Department of Finance

Gerald R. Jensen

Northern Illinois University

Date Written: December 15, 2011

Abstract

Previous research attributes long-run reversals to investor over-reaction or tax-motivated trading; we offer an alternative explanation based on aggregate funding conditions. Our evidence shows that prices rebound for stocks that have performed poorly over the past several years (Losers); however, the rebound occurs only during favorable funding environments. In contrast, stocks exhibiting strong long-term past performance (Winners) only reverse course if funding conditions are unfavorable. Past research shows that the three-factor model explains long-run stock reversals; we find that funding conditions play an instrumental role in this observation. Specifically, small, distressed Losers reverse substantially, but only when funding conditions are unconstrained. In contrast, small Winners reverse significantly, but only when funding is constrained. Finally, we show that the reversal pattern is closely linked to both the funding environment and a firm’s level of financial constraints, which suggests that both factors influence investor pricing decisions for Losers and Winners.

Keywords: Long-run price reversals, funding conditions, monetary policy

JEL Classification: G12, G14, E52

Suggested Citation

Garcia-Feijoo, Luis and Jensen, Gerald, Funding Conditions and the Long-Run Reversal in Stock Returns (December 15, 2011). Available at SSRN: https://ssrn.com/abstract=1787287 or http://dx.doi.org/10.2139/ssrn.1787287

Luis Garcia-Feijoo (Contact Author)

Florida Atlantic University - Department of Finance ( email )

777 Glades Rd
Boca Raton, FL 33431
United States
954-236-1239 (Phone)

Gerald Jensen

Northern Illinois University ( email )

Barsema Hall
Finance Department
DeKalb, IL 60115
United States
815-753-6399 (Phone)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
88
Abstract Views
1,038
rank
349,690
PlumX Metrics