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Dissecting the effectiveness of firm financial strength in predicting Chinese stock market

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  • Jiang, Fuwei
  • Jin, Fujing
  • Tang, Guohao

Abstract

This paper studies whether the financial strength measure, F-score, can predict returns in the Chinese stock market and its economic explanations. The results suggest that high F-score firms can generate high expected stock returns. Additionally, the predictability of F-score is robust after controlling for common factors in Fama–French models, and other firm characteristics and risks. We find that the premium generated by F-score in Chinese stock market is stronger following higher level of investor sentiment and for firms with higher limits to arbitrage and lower investment frictions, consistent with both the behavioral mispricing and the investment-q asset pricing theories.

Suggested Citation

  • Jiang, Fuwei & Jin, Fujing & Tang, Guohao, 2020. "Dissecting the effectiveness of firm financial strength in predicting Chinese stock market," Finance Research Letters, Elsevier, vol. 32(C).
    • Handle: RePEc:eee:finlet:v:32:y:2020:i:c:s1544612319303873
    DOI: 10.1016/j.frl.2019.101332
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    References listed on IDEAS

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    Cited by:

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    2. Zhao, Lu & Lin, Lei, 2022. "Does behavioral-motivated volatility effect explain the beta anomaly? Evidence from China," Finance Research Letters, Elsevier, vol. 46(PA).

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    More about this item

    Keywords

    Financial strength; F-score; Chinese stock market; Mispricing; Q theory of investment;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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