Loss Persistence and Returns in the UK

Accounting and Business Research, Forthcoming

Posted: 5 May 2015

See all articles by Wei Jiang

Wei Jiang

Alliance Manchester Business School, University of Manchester

Nuno Soares

Universidade do Porto

Andrew W. Stark

Alliance Manchester Business School, University of Manchester

Date Written: May 4, 2015

Abstract

In this study, we examine whether estimated loss reversal probabilities are fully reflected in UK stock market prices. Overall, we provide evidence of varying degrees and types of loss firm mispricing with respect to estimated loss reversal probabilities. In particular, a significant and positive relationship between loss reversal probability and annual returns is found only for firms with higher trading costs. When looking at monthly returns, however, especially for the financial statement release month subsequent to the loss year, a significant and positive relationship is found for all firms. Thus, the evidence is consistent with UK market participants not fully incorporating relevant information into the pricing of loss firms and, as a consequence, being surprised by the content of the earnings for many or all UK loss firms.

Keywords: accounting losses, loss reversal, mispricing, return anomalies

JEL Classification: M41 G14

Suggested Citation

Jiang, Wei and Soares, Nuno and Stark, Andrew W., Loss Persistence and Returns in the UK (May 4, 2015). Accounting and Business Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2602448

Wei Jiang (Contact Author)

Alliance Manchester Business School, University of Manchester ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

Nuno Soares

Universidade do Porto ( email )

Faculdade de Engenharia
Rua Dr. Roberto Frias
Porto, 4200-465
Portugal

Andrew W. Stark

Alliance Manchester Business School, University of Manchester ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

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