Contextual Fundamental Analysis Through the Prediction of Extreme Returns

Messod D. Beneish (), Charles M. C. Lee () and Robin L. Tarpley ()
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Messod D. Beneish: Indiana University
Charles M. C. Lee: Cornell University
Robin L. Tarpley: Georgetown University

Review of Accounting Studies, 2001, vol. 6, issue 2, No 2, 165-189

Abstract: Abstract This study examines the usefulness of contextual fundamental analysis for the prediction of extreme stock returns. Specifically, we use a two-stage approach to predict firms that are about to experience an extreme (up or down) price movement in the next quarter. In the first stage, we define the context for analysis by identifying extreme performers; in the second stage we develop a context-specific forecasting model to separate winners from losers. We show that extreme performers share many common market-related attributes, and that the incremental forecasting power of accounting variables with respect to future returns increases after controlling for these attributes. Collectively, these results illustrate the usefulness of conducting fundamental analysis in context.

Keywords: returns prediction; market efficiency; financial statement analysis; volatility; torpedoes; rockets value (search for similar items in EconPapers)
Date: 2001
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DOI: 10.1023/A:1011654624255

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