Review of Accounting Studies, 6, 191–195, 2001
2001 Kluwer Academic Publishers. Manufactured in The Netherlands.
Discussion of: “Contextual Fundamental Analysis
Through the Prediction of Extreme Returns”
RICHARD G. SLOAN
School of Business Administration, University of Michigan, Ann Arbor, MI 48109-1234, USA
Abstract. Beneish, Lee and Tarpley (2000) represents one of a small, but growing number of studies that de-
velop and test contextual fundamental analysis techniques. Such studies offer great promise for increasing our
understanding of the role of accounting information in evaluating ﬁrm performance. However, these studies also
introduce their own unique research design issues. In this paper, I discuss the opportunities and research design
issues facing this new line of research, using Beneish, Lee and Tarpley to illustrate my points.
Research on fundamental analysis has seen a resurgence in the last decade. Following the
lead of Ou and Penman (1989), a large number of papers have demonstrated the useful-
ness of ﬁnancial ratios based on accounting statement data to predict future performance.
However, with just a few exceptions, most of this work has been conducted at a very gen-
eral level and empirical results have been documented using broad cross-sections of ﬁrms.
Such broad sample research is useful for demonstrating the promise of fundamental re-
search and for providing some very general guidelines. However, it seems clear that most
practical applications of fundamental analysis should be carefully tailored to the charac-
teristics of the ﬁrms being analyzed. For example, a cursory analysis of sell-side research
reports reveals that analysis techniques vary systematically as a function of characteristics
such as industry membership and growth opportunities. Despite the widespread practical
use of contextual fundamental analysis, relatively little academic research has attempted
to develop and test techniques of fundamental analysis that are tailored to speciﬁc con-
texts. Thus, there are great potential opportunities for research on contextual fundamental
Beneish, Lee and Tarpley (2000) is one of the few studies investigating contextual fun-
damental analysis. Beneish, Lee and Tarpley (BLT hereafter) is also noteworthy in that it
provides the beginnings of a guiding framework for conducting contextual fundamental
analysis. In this discussion, I seek to further deﬁne this framework and to highlight some
of the research design issues confronted in applying this framework. I use the BLT study to
illustrate several of my points. My discussion is divided into three sections, which corre-
spond to the three major steps in the BLT framework for conducting contextual fundamental
analysis. I begin by discussing how one goes about selecting a fruitful context in which
to conduct research. Next, I discuss how one goes about building a fundamental analysis
model that is tailored to the selected context. Finally, I discuss issues arising in evaluating
the usefulness of the contextual fundamental analysis model.