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Enhancement of value investing strategies based on financial statement variables: the German evidence

Author

Listed:
  • Eero J. Pätäri

    (Lappeenranta University of Technology)

  • Timo H. Leivo

    (Lappeenranta University of Technology)

  • Janne Hulkkonen

    (Rainmaker Numbers)

  • J. V. Samuli Honkapuro

    (Lappeenranta University of Technology)

Abstract

This paper examines the added-value of combining traditional valuation ratios with each other as well as with some financial statement variables in the German stock markets during the 2000–2015 period. The results show that combination pays off and, moreover, that the benefits of combination are greater in Germany than in most other developed stock markets. Particularly, we find strong evidence of the added-value of using Piotroski’s F-score as a supplementary selection criterion for value stocks as well as for low-accrual stocks. Our results show further that the F-score also boosts the efficacy of other valuation ratios besides the book-to-price ratio. In addition, the inclusion of F-score besides a relative value measure tends to increase the average market equity of portfolio firms. The decomposition of the full-sample-period performance into separate bull- and bear-period performance shows clearly that the better performance of F-score-boosted portfolios is mostly attributable to their outperformance during bearish periods, even though on average, they also generate higher bull-period returns than the comparable value portfolios formed without F-score. The use of F-score as a supplementary criterion also increases the proportion of stocks that earn above-market-average returns during the subsequent holding period. For the first time in the financial literature, we also document a strong relationship between high F-score stocks and momentum stocks.

Suggested Citation

  • Eero J. Pätäri & Timo H. Leivo & Janne Hulkkonen & J. V. Samuli Honkapuro, 2018. "Enhancement of value investing strategies based on financial statement variables: the German evidence," Review of Quantitative Finance and Accounting, Springer, vol. 51(3), pages 813-845, October.
    • Handle: RePEc:kap:rqfnac:v:51:y:2018:i:3:d:10.1007_s11156-017-0689-y
    DOI: 10.1007/s11156-017-0689-y
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    Cited by:

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    4. Pilch Bartłomiej, 2023. "Is value investing based on scoring models effective? The verification of F-Score-based strategy in the Polish stock market," Economics and Business Review, Sciendo, vol. 9(4), pages 121-152, December.

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    More about this item

    Keywords

    Value premium; Valuation multiples; Value investing; Value anomaly; Accrual anomaly;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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