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Separating Winners from Losers: Composite Indicators Based on Fundamentals in the European Context

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  • Borja Amor-Tapia

    (University of Leon, Spain)

  • Maria T. Tascon

    (University of Leon, Spain)

Abstract

Our work tests the usefulness of score measures based on fundamental signals in an out-of-sample study during the past two decades. While previous research, primarily focused on the US, demonstrates that fundamental signals derived from financial statements allow for future abnormal stock returns, our European sample documents that Xue-Zhang’s FSCORE2 and Wahlen-Wieland's PEIS do not serve as a source of market anomalies. By contrast, other fundamental signals—Piotroski’s FSCORE and Mohanram’s GSCORE—still allow for abnormal returns in our sample and period. We also contribute to the market efficiency debate by documenting the role of idiosyncratic volatility, transaction costs and noise trader risk in the persistence of market anomalies, supporting the existence of limits to arbitrage for these investment strategies.

Suggested Citation

  • Borja Amor-Tapia & Maria T. Tascon, 2016. "Separating Winners from Losers: Composite Indicators Based on Fundamentals in the European Context," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 66(1), pages 70-94, February.
  • Handle: RePEc:fau:fauart:v:66:y:2016:i:1:p:70-94
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    References listed on IDEAS

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    More about this item

    Keywords

    fundamental analysis; stock valuation; mispricing; market efficiency; limits to arbitrage;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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