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Abnormal returns using accounting information within a value portfolio

Abnormal returns using accounting information within a value portfolio PurposeThis paper investigates whether a simple accounting information-based fundamental analysis strategy could identify winners from losers within a portfolio of high book-to-market (value) stocks, over the last decade in the Indian equity market, where historically, information disclosure and transparency levels have been on the lower side.Design/methodology/approachUsing a sample of ‘value’ firms, the authors formulate an ‘F-score’ for each firm as the sum of binary signals (favourable and unfavourable), with respect to nine key variables. The authors then form ten equal size F-score portfolios within the value band for each year, and track the performance of robust high F-score firms vis-à-vis that of weaker low F-score firms.FindingsThe study highlights that the historical success of a value strategy, in general, relies on the strong performance of a few firms while ‘tolerating the poor performance of many deteriorating companies’ within the broad value group and shows that firms with strong fundamentals within the value group outperform their less robust counterparts, based on absolute as well as risk adjusted measures.Practical implicationsThe results of the study show that strong performers can indeed be distinguished from underperformers within the broad category of value stocks. This can have significant implications for investors at large in the Indian equity market.Originality/valueThe study suggests an approach to identify potential winners within a broad ‘value’ portfolio using an array of accounting information, even in a relatively less transparent Indian equity market. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Accounting Research Journal Emerald Publishing

Abnormal returns using accounting information within a value portfolio

Accounting Research Journal , Volume 30 (01): 16 – May 2, 2017

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References (21)

Publisher
Emerald Publishing
Copyright
Copyright © Emerald Group Publishing Limited
ISSN
1030-9616
DOI
10.1108/ARJ-01-2015-0003
Publisher site
See Article on Publisher Site

Abstract

PurposeThis paper investigates whether a simple accounting information-based fundamental analysis strategy could identify winners from losers within a portfolio of high book-to-market (value) stocks, over the last decade in the Indian equity market, where historically, information disclosure and transparency levels have been on the lower side.Design/methodology/approachUsing a sample of ‘value’ firms, the authors formulate an ‘F-score’ for each firm as the sum of binary signals (favourable and unfavourable), with respect to nine key variables. The authors then form ten equal size F-score portfolios within the value band for each year, and track the performance of robust high F-score firms vis-à-vis that of weaker low F-score firms.FindingsThe study highlights that the historical success of a value strategy, in general, relies on the strong performance of a few firms while ‘tolerating the poor performance of many deteriorating companies’ within the broad value group and shows that firms with strong fundamentals within the value group outperform their less robust counterparts, based on absolute as well as risk adjusted measures.Practical implicationsThe results of the study show that strong performers can indeed be distinguished from underperformers within the broad category of value stocks. This can have significant implications for investors at large in the Indian equity market.Originality/valueThe study suggests an approach to identify potential winners within a broad ‘value’ portfolio using an array of accounting information, even in a relatively less transparent Indian equity market.

Journal

Accounting Research JournalEmerald Publishing

Published: May 2, 2017

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