Abnormal Returns to a Fundamental Analysis Strategy: Evidence from India

Abstract

This paper investigates whether a simple accounting based fundamental analysis strategy has earned superior returns within a portfolio of low price-to-book (value) stocks in the Indian equity market over the last decade. In line with Piotrosky (2000) we developed an F-score combining fundamentals pertaining to three broad areas: profitability, leverage & liquidity and efficiency to identify robust firms and weaker firms within a broad group of value stocks. We highlighted, that success of a value strategy relies on the strong performance of a few firms within the group while ‘tolerating the poor performance of many deteriorating companies’ within the same group. We show that high F score firms with robust fundamentals indeed earn a superior return based on absolute and market risk adjusted measures. The abnormal returns persist even after controlling for size and book to market in line with Fama French three factor model.