Using Fundamental Analysis to Assess Earnings Quality: Evidence from the Center for Financial Research and Analysis

Abstract

We document post-event negative abnormal returns to the (implicit) sell recommendations of a group of fundamental analysts. We also find statistically significant deterioration in the financial performance of the identified firms in the year after the recommendations. Together the results are consistent with the claim of fundamental analysts that they are able to identify firms that are successfully masking operational problems with aggressive accounting. The results provide a strong rationale for future research to identify specific techniques of fundamental analysis that can be employed to detect operational problems masked by aggressive accounting practices.

JEL Classification: G14, G29, M41