scispace - formally typeset
Search or ask a question
Journal ArticleDOI

Abnormal returns using accounting information within a value portfolio

15 Mar 2017-Accounting Research Journal (Emerald)-Vol. 30, Iss: 1, pp 73-88
TL;DR: In this article, a simple accounting information-based fundamental analysis strategy was proposed to 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.
Abstract: Purpose This 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/approach Using 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-a-vis that of weaker low F-score firms. Findings The 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 implications The 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/value The 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.
Citations
More filters
Posted Content
TL;DR: In this article, the authors explored the possibility of value premium in Indian stock market and tried to find the magnitude and pattern of the value premium, if any, in the period from January 1996 to December 2010.
Abstract: For many years, researchers have argued that ‘value strategies’ outperform the ‘growth strategies’. In this paper, we have attempted to explore this possibility in the Indian stock market and tried to find the magnitude and pattern of value premium, if any. The results indicated that value premium did exist in the Indian stock market during the study period, i.e., January 1996 to December 2010. The premiums were visible for both absolute performance measures like average returns and buy-and-hold returns, and risk-adjusted performance measures like Jensen’s Alpha, Treynor’s ratio, Sharpe’s ratio and Fama measure.

8 citations

Journal ArticleDOI
TL;DR: In this paper , a simple accounting-based fundamental analysis is employed to establish the conceptual framework of this research which aims to discover the relationship between ROI and the historic financial indices documented in financial statements.
Abstract: The purpose of this paper is to explore the influencing factors of return on investment (ROI) from listed companies in China’s banking industry during the COVID-19 epidemic. Based on value investing perspectives, a simple accounting -based fundamental analysis is employed to establish the conceptual framework of this research which aims to discover the relationship between ROI and the historic financial indices documented in financial statements. The results from the empirical analysis shows that average three-year earning per share has a significant positive impact on ROI,while PB and NPL ratios have a significant negative impact on ROI, however, the size of the bank does not have an impact on ROI.
Journal ArticleDOI
TL;DR: This article extracted and analyzed semantic, linguistic, emotional, and sentiment-based features in non-numeric communication channels of these poor-performing firms and their peers and deployed various Machine Learning algorithms to identify loser firms way ahead in time.
Abstract: Nonperforming assets in any banking system have stressed the economic health of nations. Resultantly, literature has given considerable impetus to predict failures and bankruptcy. Past studies have focused on the outcome of failures, while, there is a dearth of studies focusing on ongoing firms in bad shape. We plug this gap and attempt to identify underlying communication patterns for firms witnessing prolonged underperformance. Using text mining, we extract and analyze semantic, linguistic, emotional, and sentiment-based features in non-numeric communication channels of these poor-performing firms and their peers. These uncovered patterns highlight the use of vocabulary and tone of communication, in correspondence to their financial well-being. Furthermore, using such patterns, we deploy various Machine Learning algorithms to identify loser firm(s) way ahead in time. We observe promising accuracy over a time window of five years. Such early warning signals can be of critical importance to various stakeholders of a firm. Exploration of writing style-related features for any firm would help its investors, lending agencies to assess the likelihood of future underperformance. Firm management can use them to take suitable precautionary measures and preempt the future possibility of distress. While investors and lenders can be benefitted from this incremental information to identify the likelihood of future failures.
References
More filters
Journal ArticleDOI
TL;DR: In this article, the authors identify five common risk factors in the returns on stocks and bonds, including three stock-market factors: an overall market factor and factors related to firm size and book-to-market equity.

24,874 citations

Journal ArticleDOI
TL;DR: In this paper, Bhandari et al. found that the relationship between market/3 and average return is flat, even when 3 is the only explanatory variable, and when the tests allow for variation in 3 that is unrelated to size.
Abstract: Two easily measured variables, size and book-to-market equity, combine to capture the cross-sectional variation in average stock returns associated with market 3, size, leverage, book-to-market equity, and earnings-price ratios. Moreover, when the tests allow for variation in 3 that is unrelated to size, the relation between market /3 and average return is flat, even when 3 is the only explanatory variable. THE ASSET-PRICING MODEL OF Sharpe (1964), Lintner (1965), and Black (1972) has long shaped the way academics and practitioners think about average returns and risk. The central prediction of the model is that the market portfolio of invested wealth is mean-variance efficient in the sense of Markowitz (1959). The efficiency of the market portfolio implies that (a) expected returns on securities are a positive linear function of their market O3s (the slope in the regression of a security's return on the market's return), and (b) market O3s suffice to describe the cross-section of expected returns. There are several empirical contradictions of the Sharpe-Lintner-Black (SLB) model. The most prominent is the size effect of Banz (1981). He finds that market equity, ME (a stock's price times shares outstanding), adds to the explanation of the cross-section of average returns provided by market Os. Average returns on small (low ME) stocks are too high given their f estimates, and average returns on large stocks are too low. Another contradiction of the SLB model is the positive relation between leverage and average return documented by Bhandari (1988). It is plausible that leverage is associated with risk and expected return, but in the SLB model, leverage risk should be captured by market S. Bhandari finds, howev er, that leverage helps explain the cross-section of average stock returns in tests that include size (ME) as well as A. Stattman (1980) and Rosenberg, Reid, and Lanstein (1985) find that average returns on U.S. stocks are positively related to the ratio of a firm's book value of common equity, BE, to its market value, ME. Chan, Hamao, and Lakonishok (1991) find that book-to-market equity, BE/ME, also has a strong role in explaining the cross-section of average returns on Japanese stocks.

14,517 citations

Journal ArticleDOI
TL;DR: In this paper, a firm that must issue common stock to raise cash to undertake a valuable investment opportunity is considered, and an equilibrium model of the issue-invest decision is developed under these assumptions.

13,939 citations

Posted Content
TL;DR: In this paper, the authors provide evidence that value strategies yield higher returns because these strategies exploit the mistakes of the typical investor, and not because these riskier strategies are fundamentally riskier.
Abstract: For many years, stock market analysts have argued that value strategies outperform the market. These value strategies call for buying stocks that have low prices relative to earnings, dividends, book assets, or other measures of fundamental value. While there is some agreement that value strategies produce higher returns, the interpretation of why they do so is more controversial. This paper provides evidence that value strategies yield higher returns because these strategies exploit the mistakes of the typical investor and not because these strategies are fundamentally riskier.

3,879 citations

Journal ArticleDOI
TL;DR: In this article, the authors provide evidence that value strategies yield higher returns because these strategies exploit the suboptimal behavior of the typical investor and not because these riskier strategies are fundamentally riskier.
Abstract: For many years, scholars and investment professionals have argued that value strategies outperform the market. These value strategies call for buying stocks that have low prices relative to earnings, dividends, book assets, or other measures of fundamental value. While there is some agreement that value strategies produce higher returns, the interpretation of why they do so is more controversial. This article provides evidence that value strategies yield higher returns because these strategies exploit the suboptimal behavior of the typical investor and not because these strategies are fundamentally riskier. FOR MANY YEARS, SCHOLARS and investment professionals have argued that

3,491 citations