Fundamental Analysis of Banks: The Use of Financial Statement Information to Screen Winners from Losers.

51 Pages Posted: 20 Nov 2017

See all articles by Partha S. Mohanram

Partha S. Mohanram

University of Toronto - Rotman School of Management

Sasan Saiy

University of Waterloo

Dushyantkumar Vyas

University of Toronto - Rotman School of Management; University of Toronto at Mississauga

Date Written: October 1, 2017

Abstract

This study investigates the efficacy of a fundamental analysis-based approach to screen U.S. bank stocks. We construct an index (BSCORE) based on fourteen bank–specific valuation signal. We document a positive association between BSCORE and future profitability changes, as well as current and one-year-ahead stock returns, implying that BSCORE captures forward looking information that the markets are yet to impound. A hedge strategy based on BSCORE yields positive hedge returns for all but two years during our 1994–2014 sample period. Results are robust to partitions of size, analyst following, and exchange listing, and persist after adjusting for risk factors. We further document a positive relation between BSCORE and future analyst forecast surprises as well as earnings announcement period returns, and a negative relation between BSCORE and future performance-based delistings. Overall, our results show that a fundamental analysis-based approach can provide useful insights for analyzing banks.

Keywords: Fundamental analysis, Bank stocks, Stock screening, Market efficiency, Financial statement analysis

JEL Classification: G14, G21, M40

Suggested Citation

Mohanram, Partha S. and Saiy, Sasan and Vyas, Dushyantkumar, Fundamental Analysis of Banks: The Use of Financial Statement Information to Screen Winners from Losers. (October 1, 2017). Review of Accounting Studies, Forthcoming, Rotman School of Management Working Paper No. 3072574, Available at SSRN: https://ssrn.com/abstract=3072574

Partha S. Mohanram (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

Sasan Saiy

University of Waterloo ( email )

Waterloo, Ontario N2L 3G1
Canada

Dushyantkumar Vyas

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

University of Toronto at Mississauga ( email )

3359 Mississauga Rd N.
3205 William Davis Building
Mississauga, Ontario L5L 1C6
Canada

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