Separating Winners from Losers among LowBook-to-Market Stocks using Financial Statement Analysis

By Partha Mohanram. 2005

348 citations recorded by the source corpus.

This paper combines traditional fundamentals, such as earnings and cash flows, with measures tailored for growth firms, such as earnings stability, growth stability and intensity of R&D, capital expenditure and advertising, to create an index – GSCORE. A long–short strategy based on GSCORE earns significant excess returns, though most of the returns come from the short side. Results are robust in partitions of size, analyst following and liquidity and persist after controlling for momentum, book-to-market, accruals and size. High GSCORE firms have greater market reaction and analyst forecast surprises with respect to future earnings announcements. Further, the results are inconsistent with a risk-based explanation as returns are positive in most years, and firms with lower risk earn higher returns. Finally, a contextual approach towards fundamental analysis works best, with traditional analysis appropriate for high BM stocks and growth oriented fundamental analysis appropriate for low BM stocks.

Subfields: Accounting, Finance, Strategy and Management

View Paper: https://www.semanticscholar.org/paper/5f5b44ffa3b1c68a6d2c5d38120b6a8e4043544b

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Citations in the corpus

Earnings Manipulation and Expected Returns (2013, positive): “…earnings quality (Lev and Thiagarajan 1993; Sloan 1996; Richardson et al. 2005), bankruptcy risk (Altman 1968; Ohlson 1980), the direction of future earnings (Ou and Penman 1989), and future returns (Holthausen and Larcker 1992; Piotroski 2000; Beneish, Lee, and Tarpley 2001; Mohanram 2005).”
The Book-to-Price Effect in Stock Returns: Accounting for Leverage (2007, positive): “Piotroski (2000) finds that, within high B/P stocks, those with lower financial health, as measured, earn lower returns while Mohanram (2005) finds that within low B/P stocks, those with weak growth attributes earn lower returns.”
CAPM for Estimating the Cost of Equity Capital: Interpreting the Empirical Evidence (2009, neutral): “…Department of Finance University of Illinois at Chicago University Hall 2431, M/C 168 601 South Morgan Chicago, IL 60607 rguo@uic.edu Ravi Jagannathan Kellogg School of Management Northwestern University 2001 Sheridan Road 431 Jacobs Center Evanston, IL 60208-2001 and NBER rjaganna@northwestern.edu”
Identifying Expectation Errors in Value/Glamour Strategies: A Fundamental Analysis Approach (2012, positive): “, Ou and Penman, 1989; Piotroski, 2000; Beneish, Lee and Tarpley, 2001; Mohanram, 2005). This study uses the financial-statement analysis-based classification developed in Piotroski (2000) to illustrate that market prices appear to systematically underreact to broad changes in firms’ fundamental eco”
Size matters, if you control your junk (2018, background): “…( Graham and Dodd, 1934; Novy-Marx, 2013 ), investment ( Fama and French, 2015 ; Hou and Van Dijk, 2017 ), growth ( Lakonishok et al., 1994; Mohanram, 2005 ), low asset growth ( Cooper et al., 2008 ), low use of accruals ( Sloan, 1996; Richardson et al., 2005 ), payout ( Baker and…”
Quality minus junk (2018, positive): “…risk tend to under-perform (Altman (1968), Ohlson (1980), Campbell, Hilscher, and Szilagyi (2008)), growing firms outperform firms with poor growth (Mohanram (2005)), and firms with high accruals are more likely to suffer subsequent earnings disappointments and their stocks tend to underperform…”