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Market Underreaction and Predictability in the Cross-Section of Japanese Stock Returns

Pascal Nguyen
University of New South Wales

August 2003

WBP Working Paper No. 003

Abstract:
In this paper, I analyze the relationship between financial statements information and stock returns for firms listed on the Tokyo Stock Exchange. Firm-specific information is captured by way of score indicative of the firm's cash flow generating potential. The results show that score-based portfolio strategies can produce significant abnormal returns over a 10-year sample period. The excess return of high-score portfolios does not appear to result from a higher exposure to risk factors. The predictability of cross-section returns does not derive either from price momentum. I find that large stocks offer little profits to score-based portfolio strategies. Most of the abnormal returns are concentrated on small firms. The evidence is strongly supportive of a market underreaction to the financial information released by smaller lightly researched firms.

Keywords: return predictability, market underreaction, stock returns, Japanese stocks

JEL Classifications: G14

Working Paper Series

Date posted: September 22, 2003 ; Last revised: September 22, 2003

Suggested Citation

Nguyen, Pascal,Market Underreaction and Predictability in the Cross-Section of Japanese Stock Returns(August 2003). WBP Working Paper No. 003. Available at SSRN: http://ssrn.com/abstract=436800 or DOI: 10.2139/ssrn.10.2139/ssrn.436800

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Contact Information

Pascal Nguyen (Contact Author)

University of New South Wales ( email )

Sydney NSW 2052 Australia
(61) 2-9385-5773 (Phone)
(61) 2-9385-6730 (Fax)

HOME PAGE: http://www.banking.unsw.edu.au/pascalnguyen/