High book –to –market firms have created a unique opportunity for the investigation of the simple fundamental analysis heuristics ability to different firms. When the strategy of simple accounting-based fundamental analysis is applied to the firms it will cause shifting of the distribution of the return earning. After the analysis was done about the investment strategy there was high BM which is high book-to-market when forming their selling and buying recommendations. 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 the nonfinancial information because the growth stock valuation is mostly based on resultant cash flows and long-term forecast of sales.
Besides, there should be more focus on the changes in the firm fundamentals to buy the valuation of value stock which should be accomplished by the study of financial statements. Investors can use more dynamic investment approach which, will be embedded in the financial statement of the firm using multiple pieces of information. There are financial signals that can be used to differentiate high BM firms. In a firm the average high BM is financial distress which is mostly associated with persistently low profits, liquidity, margins, cash flows and also high levels of financial leverage. 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 so as to compute the fundamental signals into three 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. Additionally most positive returns exist due to the median returns .According to evidence given financial statement analysis is said to be fairly robust in all levels including trading volume, analysis and share price. Annually firms are selected from the same book-to-market quintile, and as a result, the pattern is said to be different risk characteristics mostly from across the F-SCORE ranking.
Conceptually, there are firms with the strongest subsequent return 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 book-to-market are characterized and are observed in market-adjusted returns. Several known effects could be generated due to the strong relationship that F-SCORE has due to the systematic power. Historically, the success of the F-SCORE is 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 improvement is considered to be associated with the market-adjusted returns in the portfolio formation. One important concept is the addition of variables that are designed to capture equity issuance, momentum,and accrual reversal.
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’ tat was used.The negative returns were only 0.036%, and it shows that the fundamental analysis strategy worked for many firms. There is a strong negative relation between a firm ex-ante financial strength as measured by the F-SCORE. After the investigation was done, the results showed that the subsequent financial performance pattern was inconsistent, which is a risk. The suggestion that was 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 al the negatives outcomes.
In conclusion,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 simple accounting-based fundamental analysis strategies applied to the portfolio of the high book-to-market, there is a shift in distribution. The distribution returns the earning to the investors, which prospect a generic high BM portfolio. Furthermore, the mean return that is earned by the high -book-to-market can be increased by around 7.5% annually. It is done to have a strong top BM firm that has returns shifting to the right. Additionally, the small and medium-size firm benefits from the financial statement analysis because all the concentration with the portfolio of high BM is focused on them.