Fundamental Analysis - Definition
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Fundamental Analysis Definition Academic Research on Fundamental Analysis Fundamental analysis, future earnings, and stock prices, Abarbanell, J. S., & Bushee, B. J. (1997). Journal of Accounting Research,35(1), 1-24. This paper examines empirical relations between rules of fundamental analysis and actual future earnings changes, analysts' earnings forecast revisions, and contemporaneous stock returns. Results indicate that many of the fundamental signals are related to future earnings and forecast revisions in the same way they are related to returns, however some significant exceptions are noted. Additional tests suggest analysts' forecast revisions display generalized underreaction to the future earnings information contained in some of the fundamental signals. Short-sellers,fundamental analysis, and stock returns, Dechow, P. M., Hutton, A. P., Meulbroek, L., & Sloan, R. G. (2001). Journal of Financial Economics,61(1), 77-106. This paper explores the future stock returns of firms with low ratios of fundamentals (such as earning and book values) to market values. It documents that short-sellers position themselves in the stock of such firms, and then cover their positions as the ratios mean-revert. It also shows that short-sellers refine their trading strategies to minimize transactions costs and maximize their investment returns. Abnormal returns to afundamental analysisstrategy, Abarbanell, J. S., & Bushee, B. J. (1998).Accounting Review, 19-45. This paper examines whether the application of fundamental analysis can yield significant abnormal returns. Using a collection of signals that reflect traditional rules of fundamental analysis related to contemporaneous changes in inventories, accounts receivables, gross margins, selling expenses, capital expenditures, effective tax rates, inventory methods, audit qualifications, and labor force sales productivity, the authors form portfolios that earn an average 12-month cumulative size-adjusted abnormal return of 13.2 percent. The paper aims to show that the fundamental signals provide information about future returns that is associated with future earnings news. Cost behavior andfundamental analysisof SG&A costs, Anderson, M., Banker, R., Huang, R., & Janakiraman, S. (2007). Journal of Accounting, auditing & finance,22(1), 1-28. This paper explores the custom interpretation of an increase in the ratio of selling in fundamental analysis. The paper observes that both fixity of costs and stickiness of costs may cause the ratio of SG&A costs to sales to increase, rather than decrease proportionally with sales, when revenue declines. It also estimates an earnings prediction model and find that future earnings are positively related to changes in the SG&A cost ratio in periods in which revenue declines, inconsistent with traditional interpretation of SG&A cost changes. Accounting anomalies andfundamental analysis: A review of recent research advances, Richardson, S., Tuna, I., & Wysocki, P. (2010). Journal of Accounting and Economics,50(2-3), 410-454. In this paper, the authors survey recent research in accounting anomalies and fundamental analysis. The study uses forecasting of future earnings and returns as an organizing framework and suggest a roadmap for research aiming to document the forecasting benefits of accounting information. It also provide a new analysis on how an ex ante and ex post treatment of risk and transaction costs affects the accrual and PEAD anomalies. Fundamental analysisand subsequent stock returns, Greig, A. C. (1992). Journal of Accounting and Economics,15(2-3), 413-442. This paper re-examines the Ou and Penman (1989) conclusion that fundamental analysis identifies equity values not currently reflected in stock prices, and thus systematically predicts abnormal returns. Importance of technical andfundamental analysisin the European foreign exchange market, Oberlechner, T. (2001). International Journal of Finance & Economics,6(1), 81-93. This article presents findings of a questionnaire and an interview survey on the perceived importance of chartist/technical and fundamental analysis among foreign exchange traders and financial journalists in Frankfurt, London, Vienna, and Zurich. Results confirm that most traders use both forecasting approaches, and that the shorter the forecasting horizon, the more important chartist/technical analysis is. Contextualfundamental analysisthrough the prediction of extreme returns, Beneish, M. D., Lee, C. M., & Tarpley, R. L. (2001). Review of Accounting Studies,6(2-3), 165-189. This study examines the usefulness of contextual fundamental analysis for the prediction of extreme stock returns. The study uses a two-stage approach to predict firms that are about to experience an extreme (up or down) price movement in the next quarter. It shows that extreme performers share many common market-related attributes, and that the incremental forecasting power of accounting variables with respect to future returns increases after controlling for these attributes. This study aims to illustrate the usefulness of conducting fundamental analysis in context. Generalized DEA model offundamental analysisand its application to portfolio optimization, Edirisinghe, N. C., & Zhang, X. (2007). Journal of Banking & Finance,31(11), 3311-3335. This paper examines the use of fundamental analysis in asset selection for equity portfolio management. In this paper, a generalized data envelopment analysis (DEA) model is developed to analyze a firms financial statements over time in order to determine a relative financial strength indicator (RFSI) that is predictive of firms stock price returns. The authors utilize a two-step heuristic algorithm that combines random sampling and local search optimization. The proposed approach is tested with 230 firms from various US technology-industries to determine optimized RFSI indicators for stock selection. Afundamental analysisof Korean stock returns, Mukherji, S., Dhatt, M. S., & Kim, Y. H. (1997). Financial Analysts Journal,53(3), 75-80. This paper investigates the large stock holdings in Korea, and the possibility of this nation to be open to foreign investors. It analyses an investigation of the relations between stock returns and fundamental variables in Korea, annual stock returns during the 198293 period were positively related to bookmarket, salesprice, and debtequity ratios, negatively related to firm size, and not significantly related to the earningsprice ratio or beta. With this investigation, the paper aims to show that value stocks outperform growth stocks over long periods. The use offundamentaland technical analyses by foreign exchange dealers: Hong Kong evidence, Lui, Y. H., & Mole, D. (1998). Journal of International Money and Finance,17(3), 535-545. This article reports the results of a questionnaire survey conducted in February 1995 on the use by foreign exchange dealers in Hong Kong of fundamental and technical analyses to form their forecasts of exchange rate movements. Findings reveal that more than 85% of respondents rely on both fundamental and technical analyses for predicting future rate movements at different time horizons.The article finds that interest rate-related news is found to be a relatively important fundamental factor in exchange rate forecasting, while moving average and/or other trend-following systems are the most useful technical technique.