Resumen de Loss persistence and returns in the UK

Wei Jiang, Nuno Soares, Andrew W. Stark

• In this study, we examine whether estimated loss reversal probabilities are fully reflected in UK stock market prices. Overall, we provide evidence of varying degrees and types of loss firm mispricing with respect to estimated loss reversal probabilities. In particular, a significant and positive relationship between loss reversal probability and annual returns is found only for firms with higher trading costs. When looking at monthly returns, however, especially for the financial statement release month subsequent to the loss year, a significant and positive relationship is found for all firms. Thus, the evidence is consistent with UK market participants not fully incorporating relevant information into the pricing of loss firms and, as a consequence, being surprised by the content of the earnings for many or all UK loss firms.