Can the FSCORE add value to anomaly-based portfolios? A reality check in the German stock market

Eero Pätäri, Timo H. Leivo and Sheraz Ahmed
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Timo H. Leivo: LUT University
Sheraz Ahmed: LUT University

Financial Markets and Portfolio Management, 2022, vol. 36, issue 3, No 3, 367 pages

Abstract: Abstract This paper examines the added value of using financial statement information, particularly that of Piotroski’s (J Account Res 38:1, 2000. https://doi.org/10.2307/2672906 ) FSCORE, for equity portfolio selection in the German stock market in a realistic research setting in which the critique against the implementability of FSCORE-based trading strategies is taken into account. We show that the performance of annually rebalanced long-only portfolios formed on any of the examined 12 accounting-based primary criteria improves by including the FSCORE as a supplementary criterion. Our study is the first to show that although the FSCORE boost is strongest for the 1-year holding period length, it also holds, on average, for the 3-year holding period. The use of a 3-year updating frequency is particularly beneficial for the low-accrual portfolio that—when supplemented with the high-FSCORE threshold—generates the best overall performance among all 75 portfolios examined. Moreover, we show that a high FSCORE is also an efficient stand-alone criterion for long-only portfolio formation.

Keywords: Value anomaly; Accrual anomaly; Financial strength; FSCORE; Valuation ratio; Equity investing (search for similar items in EconPapers)
JEL-codes: G11 M41 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1007/s11408-021-00400-9

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