This study investigates the role of free cash flows and (cross-sectional and time-series) price momentum in predicting future stock returns. Past returns and free cash flows each positively predict future stock returns after controlling for the other, suggesting that cash flows and momentum both contain valuable and distinctive information about future stock returns. A strategy of buying past winners with high free cash flows and shorting past losers with low free cash flows significantly outperforms the traditional momentum trading strategy. The enhanced performance is not sensitive to investor sentiment, time variations, or transaction costs. Further analysis shows that the incremental cash flow effects are largely attributable to net distributions to equity/debt holders. Overall, our findings shed light on the role of corporate fundamentals in technical trading strategies.
This study investigates whether short sellers anticipate undervaluation information before a repurchase announcement. Apart from exploring investment opportunities via searching for unfavourable information, short sellers should have the same incentive to identify favourable information to prevent potential losses. An observed significant negative relation between pre‐announcement short selling activities and announcement abnormal returns supports the informed hypothesis. This negative relation is stronger under high levels of information asymmetry, and more significant when the repurchase announcement is associated with the undervaluation.
I report the empirical evidence to show how firms' expected and unexpected announcements affect investors' trading behaviour. I find that trading volume decreases before expected announcements, either scheduled or unscheduled, consistent with models that predict that discretionary liquidity traders may postpone their trading until after an anticipated news release. I also find that the magnitude of pre-announcement trading reactions is negatively associated with the level of pre-disclosure information asymmetry. I further find that trading volume is boosted before unexpected announcements, and the relation between the magnitude of pre-announcement trading reactions and the predisclosure information asymmetry is weakly significant or insignificant.
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