Combining financial statement analysis and technical analysis to enhance stock portfolio performance: A study of Indian stock market
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Date
2018
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Punjab Agricultural University, Ludhiana
Abstract
The study was undertaken to examine the performance of combined financial statement analysis and technical analysis vis-à-vis standalone financial statement analysis and technical analysis among high book-to-market (value stocks) and low book-to-market (growth stocks). To fulfil the objectives, the research was carried out for each of the FY ranging from 2008-09 to FY 2012-13. For each of FY all the listed companies of National Stock Exchange (NSE) were arranged in descending order of book-to-market (B/M) ratio using the CMIE database Prowess. The companies were then sorted into five quintiles. Top quintile (that is, highest book-to-market ratio) was chosen for high book-to-market companies and bottom quintile (that is, lowest book-to-market ratio) was chosen for low book-to-market companies. The financial statement analysis among high book-to-market stocks was carried out using Piotroski (2000) framework and that among the low book-to-market (growth stocks) was carried out using Mohanram (2005) framework. Technical analysis among both types of stocks was carried out by applying Jegadeesh and Titman (1993) and Lee and Swaminathan (2000) methodology. Results show that financial statement analysis based strategy for both value and growth stocks outperforms the market for all holding periods of 3 months, 6 months and one year. However using technical analysis based strategy this outperformance hold good only for 3 months and 6 months formation and holding periods. The combined strategy outperforms standalone technical analysis and financial statement analysis based strategy for 3 months and 6 months holding periods. However for longer holding periods (one year) this outperformance disappears. But the degree of outperformance on combining the financial statement analysis and technical analysis was greater as compared to standalone financial statement analysis or technical analysis based strategies. It can be concluded from the results that it is beneficial for investors to form their investment strategy by combining financial statement analysis and technical analysis; if he plans to hold the portfolio for not more than 6 months.
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