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The financial strength anomaly in the UK: Information uncertainty or liquidity?
journal contributionposted on 2019-07-09, 08:23 authored by Rene-Christian Kumsta, Andrew VivianAndrew 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.
- Business and Economics
Published inThe European Journal of Finance
Pages925 - 957
CitationKUMSTA, 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.
PublisherTaylor & Francis (Routledge)
- AM (Accepted Manuscript)
Rights holder© Taylor and Francis
Publisher statementThis 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