Fundamental Strength and Short-Term Return Reversal

55 Pages Posted: 10 Jan 2018 Last revised: 3 Dec 2019

See all articles by Zhaobo Zhu

Zhaobo Zhu

Shenzhen University; Audencia Business School

Licheng Sun

Old Dominion University

Min Chen

San Francisco State University - Department of Accounting

Date Written: January 1, 2019

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.

Keywords: Short-term return reversal; Fundamental strength; Analyst forecast revision; Slow incorporation of information

JEL Classification: G11, G12, G14

Suggested Citation

Zhu, Zhaobo and Sun, Licheng and Chen, Min, Fundamental Strength and Short-Term Return Reversal (January 1, 2019). Journal of Empirical Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3097420 or http://dx.doi.org/10.2139/ssrn.3097420

Zhaobo Zhu (Contact Author)

Shenzhen University ( email )

3688 Nanhai Road, Nanshan District
Shenzhen, Guangdong 518060
China

Audencia Business School ( email )

8 Road Joneliere
BP 31222
Nantes Cedex 3, 44312
France

Licheng Sun

Old Dominion University ( email )

Strome College of Business
Department of Finance
Norfolk, VA 23529-0222
United States

Min Chen

San Francisco State University - Department of Accounting ( email )

United States

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