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The financial strength anomaly in the UK: Information uncertainty or liquidity?

journal contribution
posted on 09.07.2019 by Rene-Christian Kumsta, Andrew Vivian
This paper examines two potential key drivers of the Financial Strength (F-Score) investment strategy: Information uncertainty and liquidity. We use novel, direct measures of information uncertainty related to the variability of Financial Strength signals themselves. However, Financial Strength strategy returns are not generally strongly related to these information uncertainty proxies. We also examine two proxies for liquidity. Financial strength strategy returns are generally substantially larger for illiquid firms. A zero-cost arbitrage strategy based on F-Score generates a 20% return in illiquid UK stocks and 12% in liquid UK stocks. The enhanced F-Score effect is driven by a flight from illiquidity amongst financially weak stocks. Overall, the profitability of the F-Score investment strategy appears more closely related to liquidity than to information uncertainty.

History

School

  • Business and Economics

Department

  • Business

Published in

The European Journal of Finance

Volume

26

Issue

10

Pages

925 - 957

Citation

KUMSTA, R-C. and VIVIAN, A.J., 2019. The financial strength anomaly in the UK: Information uncertainty or liquidity? The European Journal of Finance, 26 (10), pp.925-957.

Publisher

Taylor & Francis (Routledge)

Version

AM (Accepted Manuscript)

Rights holder

© Taylor and Francis

Publisher statement

This is an Accepted Manuscript of an article published by Taylor & Francis in The European Journal of Finance on 25 Jul 2019, available online: https://doi.org/10.1080/1351847X.2019.1641532

Acceptance date

03/07/2019

Publication date

2019-07-25

Copyright date

2019

ISSN

1351-847X

Language

en

Exports