Fundamental analysis and stock returns: An Indian evidence.

Venkates CK¹*, Dr.Madhu Tyagi²,  Dr. Ganesh L³

¹(Research Scholar, IGNOU, Maidan Ghari, New Delhi) Assistant Professor, GFGC, Kadugudi, Bangalore-560 067

²Professor, School of management, IGNOU, Maidan Ghari, New Delhi

³Professor, Institute of Management, Christ University, Hosur Road, Bangalore-560 030.

*Corresponding Author’s E-mail: ckv_krishna@yahoo.co.in 

Accepted 20 December, 2012

Abstract

This paper investigates the relationship between accounting information and stock returns of selected Indian stocks pertaining to Information Technology, Banking and Pharmacy sectors over the past ten years starting from 2001 to 2010. In this research work a simple financial score is designed to capture short term changes in firm’s operating efficiency, Profitability and Financial policy. Investigating accounting information and stock returns is a method adopted in Fundamental analysis, which is helpful in predicting future stock returns and for explaining the momentum phenomenon in stock prices.  For the purpose of this research work were chosen from Banking, Pharmacy and Information Technology.  For a period of ten years the data pertaining to operating efficiency, profitability and financial policy was ascertained.  All this data is then put into F SCORE as developed by Piotroski in the year 2000. The score values and market returns as provided by the companies were correlated to investigate the relationship between the score and the market adjusted returns. The goal of this paper is to show that investors can create a stronger value portfolio by using simple historical financial performance.

Keywords: Fundamental analysis, Financial Statements, Return on assets, Book to market ratio.