The Piotroski F‐score: evidence from Australia

Abstract

A market-neutral strategy that is long [short] stocks with a high [low] Piotroski F-score generates an index-weighted 0.8 percent pm on S&P/ASX 200 stocks and 1.4 percent pm on smaller stocks. Equal-weighted returns are higher and in all cases returns are statistically significant. However, the Carhart model alphas are not statistically significant except in the case of equal-weighted small cap portfolios. For such portfolios, however, most of the alpha comes from the short side and most institutional investors would find them uninvestable due to capacity constraints. A range of tests indicate that analyst neglect does not explain the F-score premium.

Quality investing in Asian stock markets

“…The further study by Piotroski and So () shows that FSCORE can systematically predict subsequent stock performance in all categories of firms sorted by book to market, including value stocks, middle stocks, and glamour stocks. International studies also confirm that FSCORE is an effective signal to measure a firm's fundamentals; and, it generates significant returns in Europe (Walkshausl, ), Australia (Hyde, ) and Asia Pacific countries (Ng and Shen, ). These studies indicate that in order to yield abnormal returns, FSCORE should be combined with book to market, which is a joint strategy of quality and value.…”

“…FSCORE is a composite measure on financial strength of a firm, based on three dimensions: profitability, leverage and liquidity, and operating efficiency. The previous studies document that FSCORE can successfully screen winners from losers in value stocks (Piotroski, ; Piotroski and So, ; Hyde, ; Ng and Shen, ); however, there is limited research on whether firms with strong financial strength can outperform the firms with weak financial strength in all stocks. Novy‐Marx () finds that the ratio of gross profit to assets (GP) has strong predictive power on stock return.…”

Piotroski’s FSCORE: international evidence

“…Risk adjustment: 3F (controls for firm size and book-to-market), 4F (controls for firm size, book-to-market, and momentum), 5F (controls for firm size, book-to-market, operating profitability, and investment), and 6F (controls for firm size, book-to-market, momentum, operating profitability, and investment). 'Significant' indicates whether the return effect associated with FSCORE is significant after risk adjustment Wang 2017), where the FSCORE has been initially discovered, Australia (Hyde 2018), and five individual Asian markets (Ng and Shen 2019). 2 Except for Ng and Shen (2019), who also focus on the post-2000 era, the two other studies investigate more extended sample periods that also include the years before 2000.…”

“…Tikkanen and Äijö (2018) show that incorporating the information contained in FSCORE improves the performance of various long-only value investing strategies in Europe that are formed on valuation ratios other than book-to-market. Finally, Hyde (2018) and Ng and Shen (2019) provide evidence on the marketwide FSCORE-return relation in Australia and five Asian equity markets.…”

“…In this paper, we revisit the FSCORE and study its returnpredictive ability in the broad cross section of international firms drawn from 20 developed non-US markets and 15 emerging markets in a unified framework of analysis over the post-publication period 2000-2018. We follow the path recently traveled by Hyde (2018) and Ng and Shen (2019) who also extend the scope of Piotroski (2000) by not just focusing on the application of FSCORE among value stocks but across all sample firms to shed light on its global economic importance as an average-return predictor.…”