Limited investor attention, relative fundamental strength, and the cross-section of stock returns

Zhaobo Zhu, Licheng Sun, Kenneth Yung and Min Chen

The British Accounting Review, 2020, vol. 52, issue 4

Abstract: We explore the underlying reasons for the apparent mispricing of firms based on fundamental information. We document that a relative fundamental strength strategy that buys (sells) firms with strong (weak) fundamentals is highly profitable for up to three years. The results cannot be explained by either price or earnings momentum, are robust to risk adjustments based on standard asset pricing models, and survive a battery of robustness tests. The strategy also works better among small firms, as well as firms with low analyst coverage and a high probability of informed trading. Our empirical findings support the hypotheses of limited investor attention and informed trading.

Keywords: Limited investor attention; Informed trading; Fundamental investing; Long-term reversal (search for similar items in EconPapers)
JEL-codes: G11 G12 G14 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:bracre:v:52:y:2020:i:4:s0890838919300848

DOI: 10.1016/j.bar.2019.100859

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