Securitie´s investment strategies based on financial statement analysis: is it possible to foresee the future?

Author(s)

Fernando Caio Galdi

• Document type: Doctoral Thesis
• Press: São Paulo.
• Institution: Universidade de São Paulo (USP). Faculdade de Economia, Administração e Contabilidade (FEA/SBD)
• Defense date: 2008-05-06

Examining board members

Alexsandro Broedel Lopes; William Eid Junior; Antonio Lopo Martinez; Eliseu Martins; Gilberto de Andrade Martins

• Advisor: Alexsandro Broedel Lopes
• Field of knowledge: Applied Social Sciences - Administration
• Indexed in: Banco de Dados Bibliográficos da USP-DEDALUS; Biblioteca Digital de Teses e Dissertações - USP
• Location: Universidade de São Paulo. Biblioteca da Faculdade de Economia, Administração e Contabilidade; T657.3; G146e

Abstract

This thesis investigates the usefulness and limitations of investment strategies based on financial statement analysis. Initially I assess the usefulness of the strategy for the full sample of Brazilian public-held firms. An additional analysis considers the partition of high book-to-market (HBM) or/and poor corporate governance (CG) firms. Capital markets research in accounting and finance show evidences that permit one to posit that firms within these groups (HBM and/or poor CG) present specific features that should enhance the usefulness of financial statement analysis as an investment tool. I find evidences that the analyzed strategies significantly differentiate between winners and losers for both groups (HBM and poor CG) but not for the full sample of firms. These results confirm and expand Piotroski\'s (2000) evidences. Further I consider the possible omitted risk-factors that could explain the results obtained. I show that the practical implementation of the strategy is more realistic (regarding stock\'s trading volume) if applied for firms with poor corporate governance arrangements when compared to the HBM ones. However, the strategy returns are lower when applied to the subset of poor corporate governance firms. This evidence is consistent with the negative expected relation between liquidity and returns (Bekaert et al, 2006) and contributes to previous research (Piotroski, 2000; Mohanran, 2005) on abnormal returns obtained with financial statements analysis. (AU)