Review of Accounting Studies

, Volume 10, Issue 2–3, pp 133–170 | Cite as

Separating Winners from Losers among LowBook-to-Market Stocks using Financial Statement Analysis

  • Partha S. MohanramEmail author


This paper combines traditional fundamentals, such as earnings and cash flows, with measures tailored for growth firms, such as earnings stability, growth stability and intensity of R&D, capital expenditure and advertising, to create an index – GSCORE. A long–short strategy based on GSCORE earns significant excess returns, though most of the returns come from the short side. Results are robust in partitions of size, analyst following and liquidity and persist after controlling for momentum, book-to-market, accruals and size. High GSCORE firms have greater market reaction and analyst forecast surprises with respect to future earnings announcements. Further, the results are inconsistent with a risk-based explanation as returns are positive in most years, and firms with lower risk earn higher returns. Finally, a contextual approach towards fundamental analysis works best, with traditional analysis appropriate for high BM stocks and growth oriented fundamental analysis appropriate for low BM stocks.


capital markets market efficiency financial statement analysis growth value book-to-market risk mispricing 

JEL Classification

G12 G14 M41 


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Copyright information

© Springer Science+Business Media, Inc. 2005

Authors and Affiliations

  1. 1.Columbia Business SchoolNew York

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