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Download fileThe financial strength anomaly in the UK: Information uncertainty or liquidity?
journal contribution
posted on 2019-07-09, 08:23 authored by Rene-Christian Kumsta, Andrew VivianAndrew VivianThis 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 FinanceVolume
26Issue
10Pages
925 - 957Citation
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 FrancisPublisher 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.2019.1641532Acceptance date
2019-07-03Publication date
2019-07-25Copyright date
2019ISSN
1351-847XPublisher version
Language
- en