Valuation uncertainty and stock returns : A quantitative study about valuation uncertainty and stock return

This paper uses stock-level data from Swedish large and mid-cap firms to examine the role of valuation uncertainty in predicting stock returns. We define valuation uncertainty in terms of “value ambiguity” and divergence of opinion. By using three different proxys for valuation uncertainty our result, contrary to assumptions made in behavioral finance, show that (1) on average, high valuation uncertainty firms do not earn lower future returns compared to low valuation uncertainty firms, and (2) in some cases, high valuation uncertainty firms actually earn higher future returns compared to their counterparts. Our results show that a stocks volatility and trade volume does not offer any significant predictive value in terms of determining a stocks future return. Further, our results indicate that a firm’s valuation uncertainty, in terms of market value, shows that higher valuation uncertainty increases a stocks future stock return. These findings are inconsistent with the theoretical models in which high valuation uncertainty in stocks intensifies investor overconfidence bias and consequently creates price points well over the stocks fundamental value, therefore resulting in lower returns