Piotroski (2000)

Reference

Value Investing: The Use of Historical Financial Information to Separate Winners from Losers^aaa

Joseph D. Piotroski

The Journal of Accounting Research, Volume 38 (Supplement), (2000), 1-41.

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Synopsis

This paper shows that we can dramatically improve the returns to a high book-to-market strategy by screening firms on measures of financial health and performance. The paper focuses on 'value stocks' in the highest quintile of book-to-market. It then allocates these stocks to deciles based on a composite measure of the financial health and performance. This composite consists of 12 signals that measure profitability, leverage, liquidity and operating efficiency. The annual hedge portfolio return to longing the high score firms and shorting the low score firms is 23%.