Explaining the Cross-Sectional Patterns of UK Expected Stock Returns: The Effect of Intangibles

Abstract

Previous UK studies of value-glamour investing strategies confirm the existence of anomalous returns. That is, most of the studies reveal that value stocks outperform glamour stocks. Several explanations were introduced for such phenomena. The rational approach argues for the risk explanation whereas, the irrational approach asserts on the miss-pricing explanation.This paper investigates the effect of intangibles in explaining the variation in stock returns. Thus, the paper developed an “intangibles-gap” for each stock listed during the period of the study. Then, the paper conducts a portfolio analysis approach to test the effect of intangibles in explaining the cross-sectional stock returns. The results show that the miss-pricing explanation is prevailed in the first two years of portfolio formulation. However, the market reacts to this by adjusting stock prices; thus, the strategy of holding long position of undervalued stocks against short position of overvalued stocks becomes unattractive in the third to fifth-year.