An Investigation into Returns from Financial Statement Analysis among High Book-to-Market Stocks

The motivation behind this paper was to see if financial statement analysis could be employed by investors to design portfolios of high book-to-market stocks that could help them earn excess returns in Indian context. Using Piotroski (2000) framework which employs a financial statement analysis based F-Score, capable of separating healthy stocks among high book-to-market stocks, and portfolio formation on the basis of the F-Score, we find convincing evidence that financial statement analysis can help investors form profitable portfolios among high book-to-market stocks. We find that portfolios with high F-Score stocks (8 to 9) provide outstanding returns on market adjusted basis. At the same time, portfolios with low F-Score (up to 3) offer poor returns and underperform the markets. Thus a value stock investor could shift his distribution of returns rightwards by investing in portfolios of only high F-Score stocks; simultaneously shorting low F-Score stocks would further amplify the returns.