Fundamental analysis and stock returns: Japan 1993-2003

This paper investigates the relationship between accounting information and stock returns for TSE firms over the past 10 years. We construct a simple financial score designed to capture short-term changes in firm operating efficiency, profitability and financial policy. Our score exhibits a strong correlation with market-adjusted returns in the current fiscal period. The correlation remains significant with returns in the following period, although its strength decreases when the holding period is lagged. Over the sample period, market-adjusted stock returns exhibit a slight mean reversion. However, stocks with high scores are characterized by momentum. We show that this property derives from a positive autocorrelation in the financial score. Also, the higher return of high score portfolios does not seem to imply a higher level of risk.