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Predicting Stock Returns Using Financial Statement Information
Author(s) -
Setiono Strong Bambang, Norman
Publication year - 1998
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/1468-5957.t01-1-00205
Subject(s) - earnings , financial statement , stock (firearms) , financial statement analysis , profitability index , economics , financial economics , common stock , econometrics , business , financial ratio , actuarial science , finance , accounting , mechanical engineering , paleontology , context (archaeology) , audit , biology , engineering
We examine the profitability of the Ou and Penman (1989a) Pr trading strategy and the Holthausen and Larcker (1992) Prob trading strategy over the period 1980–1992 in the UK. This is a test of whether an investor can earn abnormal returns by exploiting fundamental accounting data. We employ alternative abnormal return metrics and research designs to control for risk. Using a UK dataset offers an independent test because the UK differs from the US in its formal and informal financial reporting environment, its structure of share ownership, and the behaviour of its economy over the study period. We find consistent evidence that an investor could have used a summary measure of financial statement information to predict future abnormal returns by indirectly predicting one‐year‐ahead earnings changes, but only weak and inconsistent evidence that an investor could have used a summary measure of financial statement information to predict one‐year‐ahead stock returns directly. We offer some thoughts on the reasons for these different results.