Abstract
Our study tries to explore whether the financial strength proxied by F-score can predict the returns in Chinese stock market and its economic explanations. Results show that the financially stronger firms can generate higher expected raw returns and abnormal returns in Fama-French five-factor models. Additionally, predictability of F-score is robust after controlling for other firm characteristics and risks. We find that the F-score effect is stronger for the firms with a higher limits-to-arbitrage and lower investment frictions. Therefore, both behavioral mispricing and investment-based q-theoretical asset pricing models can partially explain the premium generated by F-score in Chinese stock market.
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