The synergistic effect of direct and indirect methods in fundamental analysis: Evidence from Japan

Junjian Gu and Zheng Qiao

Asia-Pacific Journal of Accounting & Economics, 2022, vol. 29, issue 5, 1299-1332

Abstract: We employ two types of firm valuation models, direct and indirect methods, to predict future stock returns and future earnings changes using a battery of variables from financial statements. We construct three investment strategies based on the valuation models and find significant abnormal returns by identifying overvalued and undervalued stocks. Furthermore, by holding the overlapping stocks between the two valuations models, we manage to construct a modified portfolio strategy that delivers the highest abnormal return, which demonstrates a synergistic effect between the two valuation methods.

Date: 2022
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DOI: 10.1080/16081625.2019.1673192

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Asia-Pacific Journal of Accounting & Economics is currently edited by Yin-Wong Cheung, Hong Hwang, Jeong-Bon Kim, Shu-Hsing Li and Suresh Radhakrishnan

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