Efficacy of using Piotroski F-Score as an Investment Model Compared to Greenblatt's Magic Formula Model in the Indian Context

Abstract

This paper examines whether a proven accounting based fundamental analysis strategy, FScore formula by Piotroski, when applied to a portfolio of high book-to-value firms of the Indian Stock Market, can shift the average returns earned by a value investor. The aim is to investigate the additional returns earned by after applying the F-Score formula to the portfolio of high BM stocks. The F-Score acts as heuristics to better investing in a value portfolio (herein referred to as a High BM portfolio). From our research, we have concluded that the F-Score methodology has given an average additional return of 30.9% on a three-year investing period with a long-short portfolio from 2014-2017. Thus, we would show that the mean return earned by a high book-to-market investor can be increased by an average of 30.9% by selecting fundamentally and financially strong high BM firms. Overall, our research indicates that the extra returns are a result of the market’s initial underreaction to the historic financial data of the firm and that the markets take time to fully incorporate the financial data into the price of the high BM firms.