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Fundamental Analysis and the Cross-Section of Stock Returns: A Data-Mining Approach

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  • Xuemin (Sterling) Yan
  • Lingling Zheng

Abstract

We construct a “universe” of over 18,000 fundamental signals from financial statements and use a bootstrap approach to evaluate the impact of data mining on fundamental-based anomalies. We find that many fundamental signals are significant predictors of cross-sectional stock returns even after accounting for data mining. This predictive ability is more pronounced following high-sentiment periods and among stocks with greater limits to arbitrage. Our evidence suggests that fundamental-based anomalies, including those newly discovered in this study, cannot be attributed to random chance, and they are better explained by mispricing. Our approach is general and we also apply it to past return–based anomalies.

Suggested Citation

  • Xuemin (Sterling) Yan & Lingling Zheng, 2017. "Fundamental Analysis and the Cross-Section of Stock Returns: A Data-Mining Approach," The Review of Financial Studies, Society for Financial Studies, vol. 30(4), pages 1382-1423.
    • Handle: RePEc:oup:rfinst:v:30:y:2017:i:4:p:1382-1423.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhx001
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    More about this item

    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

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