IDEAS home Printed from https://ideas.repec.org/a/eee/finlet/v31y2019icp110-118.html
   My bibliography  Save this article

Sorting out the financials: Making economic sense out of statistical factors

Author

Listed:
  • Lončarski, Igor
  • Vidovič, Luka

Abstract

In this paper we explore systematic and efficient use of a large amount of financial statement data most often used by financial analysts for the valuation purposes in terms of relative valuation (multiples). We use principal component analysis to analyze financial statement data and/or ratios at a company level. We transform financial statement data into new variables that exhibit distinct economic interpretations and can be considered as value drivers reflecting profitability, growth prospects, and risk.

Suggested Citation

  • Lončarski, Igor & Vidovič, Luka, 2019. "Sorting out the financials: Making economic sense out of statistical factors," Finance Research Letters, Elsevier, vol. 31(C), pages 110-118.
    • Handle: RePEc:eee:finlet:v:31:y:2019:i:c:p:110-118
    DOI: 10.1016/j.frl.2019.04.009
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1544612318309425
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.frl.2019.04.009?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Dong-Hee Kim & Hawoong Jeong, 2005. "Systematic analysis of group identification in stock markets," Papers physics/0503076, arXiv.org, revised Oct 2005.
    2. Henry Kaiser, 1958. "The varimax criterion for analytic rotation in factor analysis," Psychometrika, Springer;The Psychometric Society, vol. 23(3), pages 187-200, September.
    3. Billio, Monica & Getmansky, Mila & Lo, Andrew W. & Pelizzon, Loriana, 2012. "Econometric measures of connectedness and systemic risk in the finance and insurance sectors," Journal of Financial Economics, Elsevier, vol. 104(3), pages 535-559.
    4. Li, Baibing & Martin, Elaine B. & Morris, A. Julian, 2002. "On principal component analysis in L1," Computational Statistics & Data Analysis, Elsevier, vol. 40(3), pages 471-474, September.
    5. Hirshleifer, David & Hou, Kewei & Teoh, Siew Hong, 2009. "Accruals, cash flows, and aggregate stock returns," Journal of Financial Economics, Elsevier, vol. 91(3), pages 389-406, March.
    6. Lev, B & Thiagarajan, Sr, 1993. "Fundamental Information Analysis," Journal of Accounting Research, Wiley Blackwell, vol. 31(2), pages 190-215.
    7. Perignon, Christophe & Smith, Daniel R. & Villa, Christophe, 2007. "Why common factors in international bond returns are not so common," Journal of International Money and Finance, Elsevier, vol. 26(2), pages 284-304, March.
    8. Driessen, Joost & Melenberg, Bertrand & Nijman, Theo, 2003. "Common factors in international bond returns," Journal of International Money and Finance, Elsevier, vol. 22(5), pages 629-656, October.
    9. Piotroski, JD, 2000. "Value investing: The use of historical financial statement information to separate winners from losers," Journal of Accounting Research, Wiley Blackwell, vol. 38, pages 1-41.
    10. Fama, Eugene F. & French, Kenneth R., 2015. "A five-factor asset pricing model," Journal of Financial Economics, Elsevier, vol. 116(1), pages 1-22.
    11. Ou, Jane A. & Penman, Stephen H., 1989. "Financial statement analysis and the prediction of stock returns," Journal of Accounting and Economics, Elsevier, vol. 11(4), pages 295-329, November.
    12. repec:ebl:ecbull:v:7:y:2004:i:3:p:1-10 is not listed on IDEAS
    13. Nicholas J. Cox, 2011. "Stata tip 96: Cube roots," Stata Journal, StataCorp LP, vol. 11(1), pages 149-154, March.
    14. Abarbanell, JS & Bushee, BJ, 1997. "Fundamental analysis, future earnings, and stock prices," Journal of Accounting Research, Wiley Blackwell, vol. 35(1), pages 1-24.
    15. Fung, William & Hsieh, David A, 1997. "Empirical Characteristics of Dynamic Trading Strategies: The Case of Hedge Funds," Review of Financial Studies, Society for Financial Studies, vol. 10(2), pages 275-302.
    16. Daniel J. Fenn & Mason A. Porter & Stacy Williams & Mark McDonald & Neil F. Johnson & Nick S. Jones, 2010. "Temporal Evolution of Financial Market Correlations," Papers 1011.3225, arXiv.org, revised May 2011.
    17. M. Hossein Partovi & Michael Caputo, 2004. "Principal Portfolios: Recasting the Efficient Frontier," Economics Bulletin, AccessEcon, vol. 7(3), pages 1-10.
    18. Driessen, J.J.A.G. & Melenberg, B. & Nijman, T.E., 2000. "Common Factors in International Bond Returns," Other publications TiSEM e68d1d99-1c0f-43a6-977e-e, Tilburg University, School of Economics and Management.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Lan, Hai & Zheng, Puyang & Li, Zheng, 2021. "Constructing urban sprawl measurement system of the Yangtze River economic belt zone for healthier lives and social changes in sustainable cities," Technological Forecasting and Social Change, Elsevier, vol. 165(C).
    2. Pedro Antonio Martín-Cervantes & María del Carmen Valls Martínez, 2023. "Unraveling the relationship between betas and ESG scores through the Random Forests methodology," Risk Management, Palgrave Macmillan, vol. 25(3), pages 1-29, September.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Jun, So Young & Kim, Dong Sung & Jung, Suk Yoon & Jun, Sang Gyung & Kim, Jong Woo, 2022. "Stock investment strategy combining earnings power index and machine learning," International Journal of Accounting Information Systems, Elsevier, vol. 47(C).
    2. Libin Yang & William Rea & Alethea Rea, 2015. "Stock Selection with Principal Component Analysis," Working Papers in Economics 15/03, University of Canterbury, Department of Economics and Finance.
    3. Krauss, Christopher & Krüger, Tom & Beerstecher, Daniel, 2015. "The Piotroski F-Score: A fundamental value strategy revisited from an investor's perspective," FAU Discussion Papers in Economics 13/2015, Friedrich-Alexander University Erlangen-Nuremberg, Institute for Economics.
    4. Lu Zhang, 2017. "The Investment CAPM," European Financial Management, European Financial Management Association, vol. 23(4), pages 545-603, September.
    5. Kewei Hou & Haitao Mo & Chen Xue & Lu Zhang, 2017. "The Economics of Value Investing," NBER Working Papers 23563, National Bureau of Economic Research, Inc.
    6. Kothari, S. P., 2001. "Capital markets research in accounting," Journal of Accounting and Economics, Elsevier, vol. 31(1-3), pages 105-231, September.
    7. Ng, Chi Cheong Allen & Shen, Jianfu, 2016. "Screen winners from losers using simple fundamental analysis in the Pacific-Basin stock markets," Pacific-Basin Finance Journal, Elsevier, vol. 39(C), pages 159-177.
    8. Libin Yang & William Rea & and Alethea Rea, 2015. "Identifying Highly Correlated Stocks Using the Last Few Principal Components," Papers 1512.03537, arXiv.org.
    9. Chi Cheong Allen Ng & Jianfu Shen, 2020. "Quality investing in Asian stock markets," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 60(3), pages 3033-3064, September.
    10. Anwer S. Ahmed & Irfan Safdar, 2018. "Dissecting stock price momentum using financial statement analysis," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 58(S1), pages 3-43, November.
    11. Safdar, Irfan, 2016. "Industry competition and fundamental analysis," Journal of Accounting Literature, Elsevier, vol. 37(C), pages 36-54.
    12. Richardson, Scott & Tuna, Irem & Wysocki, Peter, 2010. "Accounting anomalies and fundamental analysis: A review of recent research advances," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 410-454, December.
    13. Tarunika Jain Agrawal & Sanjay Sehgal & Rahul Agrawal, 2020. "Disruptive Innovations, Fundamental Strength and Stock Winners: Implications for Stock Index Revisions," Vision, , vol. 24(3), pages 356-370, September.
    14. Jacobs, Heiko, 2015. "What explains the dynamics of 100 anomalies?," Journal of Banking & Finance, Elsevier, vol. 57(C), pages 65-85.
    15. Bi, XiaoGang & Tang, Judy & Tharyan, Rajesh, 2020. "Switching due diligence auditor in Chinese mergers and acquisitions," Research in International Business and Finance, Elsevier, vol. 54(C).
    16. Meena Sharma & Preeti Sharma, 2009. "Prediction of Stock Returns for Growth Firms—A Fundamental Analysis," Vision, , vol. 13(3), pages 31-40, July.
    17. Papanastasopoulos, Georgios & Thomakos, Dimitrios & Wang, Tao, 2011. "Information in balance sheets for future stock returns: Evidence from net operating assets," International Review of Financial Analysis, Elsevier, vol. 20(5), pages 269-282.
    18. Hirshleifer, David & Kewei Hou & Teoh, Siew Hong & Yinglei Zhang, 2004. "Do investors overvalue firms with bloated balance sheets?," Journal of Accounting and Economics, Elsevier, vol. 38(1), pages 297-331, December.
    19. Bartram, Söhnke M. & Grinblatt, Mark, 2018. "Agnostic fundamental analysis works," Journal of Financial Economics, Elsevier, vol. 128(1), pages 125-147.
    20. Libin Yang & William Rea & Alethea Rea, 2017. "Financial Insights from the Last Few Components of a Stock Market PCA," IJFS, MDPI, vol. 5(3), pages 1-12, July.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:finlet:v:31:y:2019:i:c:p:110-118. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/frl .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.