The Incremental Value of Qualitative Fundamental Analysis to Quantitative fundalmental Analysis: A Field Study.

This field study examines whether the human-judgment component of fundamental analysis adds incremental information beyond a quantitative model designed to identify securities that will subsequently underperform the market. The subject firm (the Firm) primarily focuses on the analysis of financial statements and other accounting disclosure. This study documents abnormal returns to a sample of 203 negative recommendations issued by the fundamental analysts between February 2007 and March 2010. In addition, I find that the qualitative element of fundamental analysis is the primary driver of the Firm’s ability to identify companies whose equity securities subsequently underperform the market. The Firm initiates coverage almost exclusively on large market capitalization companies with high liquidity and low short interest. These unique characteristics of the setting increase the likelihood that the results are not the product of returns to securities with high arbitrage and/or transaction costs.