Limited investor attention,relative fundamental strength,and the cross-section of stock returns |
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| Institution: | 1. Shenzhen Audencia Business School, Shenzhen University, Shenzhen, 518060, China;2. Audencia Business School, Nantes, 44300, France;3. Department of Finance, Strome College of Business, Old Dominion University, Norfolk, VA, 23529, USA;4. Department of Accounting, College of Business, San Francisco State University, San Francisco, CA, 94132, USA;1. Shenzhen Audencia Business School, Shenzhen University, Shenzhen, 518060, China;2. Audencia Business School, Nantes, 44300, France;3. Department of Finance, Strome College of Business, Old Dominion University, Norfolk, VA, 23529, USA;4. Department of Accounting, College of Business, San Francisco State University, San Francisco, CA, 94132, USA;1. School of Commerce, University of South Australia, Adelaide, Australia;2. Institute of Management Accountants, Montvale, NJ, USA;1. Department of Economics and Management “Marco Fanno”, University of Padua, Italy;2. School of Business and Management, Centre for Research Into Sustainability (CRIS), Centre for Critical and Historical Research on Organisation and Society (CHRONOS), Royal Holloway University of London, Egham, Surrey, TW20 0EX, UK;1. University Rey Juan Carlos, Paseo Artilleros s/n, 28032, Madrid, Spain;2. Santalucía and Universidad Complutense de Madrid, Spain;3. Universidad Complutense de Madrid and Instituto Complutense de Análisis Económico, Spain;1. Manchester Metropolitan University Business School, Department of Accounting, Finance and Banking, Manchester, M15 6BH, United Kingdom;2. Lancaster University Management School, Department of Accounting and Finance, Lancaster, LA1 4YX, United Kingdom;1. Manchester Accounting and Finance Group, University of Manchester, Booth Street West, Manchester M15 6PB, UK;2. Business School, University College Cork, College Road, Cork, Ireland;3. Accounting and Finance Group, Leeds Business School, Leeds University, LS2 9JT, UK |
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| 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. |
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| Keywords: | Limited investor attention Informed trading Fundamental investing Long-term reversal G11 G12 G14 |
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