Can Fundamental Analysis Provide Relevant Information for Understanding the Underlying Value of a Company?

Abstract

This chapter investigates the relevance of fundamental analysis (FA) for companies listed on the Euronext 100 index. Can FA provide relevant information that increases understanding of the underlying value of a company? This study leverages an FA strategy to select shares in a portfolio that can systematically yield significant, positive excess market buy-and-hold returns, 1 and 2 years after the portfolio formation. Using annual financial data available from 2000 to 2016, this analysis calculates three scores applied to construct the portfolios: the L-score, F-score, and PEIS. These insights inform investors’ potential uses of fundamental signals (scores) to obtain abnormal returns. The results show that portfolios formed with high versus low scores earn 1and 2-year abnormal returns between 2000 and 2016. This chapter contributes to scarce accounting research in European capital markets by furthering understanding of the possibility of mispriced securities.