In most firms, High book –to –market firms have created a chance for the investigation of the analysis of simple fundamentals heuristics ability separate the winners and loser firms. When the strategy analysis of fundamental accounting-based applied to the firms, it causes shifting of the distribution of the return earning. After the review done about the investment strategy, there was high BM, which is high book-to-market when forming their selling and buying recommendations (Piotroski, 2000). Based on the fundamental analysis, the value stock is said to be more conducive to the statement of financial more than growth stocks. In most firms, most investors rely on nonfinancial information because of the growth in stock valuation, which mostly based on resultant cash flows and long-term forecasts of sales.
Besides, there should be more focus on the changes in the firm fundamentals to buy the valuation of a value stock, which should be accomplished by the study of financial statements. Investors can use a more dynamic investment approach which, will be embedded in the financial statement of the firm using multiple pieces of information. There are financial signals used to select high BM firms. In a firm, the average high book-to-market is financial distress, which is mostly associated with persistently low profits, liquidity, margins, cash flows, and also high levels of financial leverage (Asness, Frazzini, Israel, & Moskowitz, 2016). The signals are nine in number that used in the measurement of three areas in a firm’s financial condition. The three areas include; Financial liquidity /leverage, operating efficiency, and profitability. The signals are mostly used because they are easy to implement interpretation and assist in giving out a summary of the statistics. Additionally, the signals can be identified either as bad or good, depending on the firm’s profitability and future prices.
The fundamental analysis strategy is not limited; it can be applied in small firms and also the big ones. To determine this annual rank is necessary to figure out the signals of fundamental into different portfolios. In fundamental analysis, there is an essential relation between share turnover, gains, and share price. Based on the partitions of market capitalization economically and statistically, the share price partitions are crucial. According to Piotroski (2000), most positive returns exist due to the median returns. The evidence given of the analysis of financial statements is said to be reasonably reliable in all stages, including volume in trading, review, and share price. Annually firms are selected from the same BM quintile, and as a result, the pattern is different risk characteristics mostly from across the F-score ranking.
Conceptually, there are companies with robust subsequent returns based on their performance, and they appear to have a small amount of operating risk and ex-ante financial. Moreover, across the F-score portfolio, small variations in size and the BM are characterized and are observed in market-adjusted returns. Several known effects could generate due to the strong relationship that F-SCORE has due to the systematic power (Montier, 2010). Historically, the success of the F-SCORE based on the underrating of financial events and historical information. F-SCORE has coefficients that indicate improvement in the control of the book-to-market and size at a point, which is a positive signal. The development is considered to be associated with the market-adjusted returns in the portfolio formation. One important concept is the addition of the variables made to capture equity issuance, momentum, and accrual.
After statistics was done for the last past years, it shows that the average market-adjusted return differences are positive, which is a higher achievement for the firms that used. The negative returns were only 0.036%, and it shows that the fundamental analysis strategy worked for many firms. There is a strong relationship that is negative between the strength of the firm of ex-ante financial as measured by the F-SCORE (Montier, 2010). After the investigation was done, the results showed that the subsequent financial performance pattern was inconsistent, which is a risk. The suggestion given is that the effects on BM are related to financial distress. Around the subsequent earning, there is a market reaction that shows how investors are over pessimistic about the future performance of the firm. In every firm, there is an expectation of the success and the growth of the firm despite all the negatives outcomes.
In conclusion, using the strategy, the winners and the losers can be separated. The subsequent has four quarterly earning the average is 0.0370%, which indicate that there is an aggregate overreaction to the past performance of the firm. When Analysis of simple accounting-based fundamental strategies practiced in the portfolio of the BM, there is a shift in distribution (Piotroski, 2000). The delivery returns the earning to the investors, which prospect a generic high BM. Furthermore, the return of the mean that is earned by the BM can be increased by around 7.5% annually. It is done to have a reliable top BM firm that has returns shifting to the right. Additionally, the small and medium-size firm benefits from the financial statement analysis because of all the concentration with the high BM of a portfolio of and focus on them.