Adding value to value stocks in Indian stock market: an empirical analysis

Purpose – The purpose of this study is to examine the relevance of an accounting-based fundamental strategy in adding value to value stocks in Indian stock market. The fundamentals-based investment strategy “F-score”, given by Joseph Piotroski, has been used on stocks having high book-to-market ratio to eliminate the firms with poor future prospects from the entire portfolio of value stocks. Design/methodology/approach – The market adjusted performance of all the firms in the sample is examined using one sample t -test. Further, F-score of all the firms in the sample is calculated and the independent sample t -test has been used to examine the significance of mean difference between high-score and low-score firms. Finally, the predictive ability of F-score in explaining the overall stock returns is examined using panel data regression analysis. Findings – Results reveal that the mean market-adjusted return of stocks, meeting all constructs of F-score is significantly larger than the entire portfolio of value stocks by 18.402 per cent annually across the period of study. The results of panel data regression made it evident that one-point improvement in aggregate F-score is associated with an about 4.93 per cent increase in one-year market-adjusted return. Practical implications – The significant mean return difference found between the high-F-score firms and the low-score firms suggests that an investor could constitute a hedge portfolio that generates positive return by selling expected losers stocks and buying expected winners. Originality/value – The present study is the first attempt made in emerging economy like India to enrich the literature on value investing strategies by examining the performance of F-score strategy to separate winners from losers in Indian stock market.