VALUE RELEVANCE OF FUNDAMENTAL SIGNALS IN THE U.S. AND SINGAPORE STOCK MARKETS

Abstract

Existing literature on the relationship between fundamental signals and stock returns mostly use signals from Lev and Thiagarajan (1993) (hereafter LT) and Piotroski (2000) on the U.S. market, despite the existence of infinitely many profitable trading strategies. Most of these studies have also not conditioned their analysis on macroeconomic variables. Furthermore, there is only one study performed on the Singapore stock market. This study examines the value relevance of LT and Piotroski’s signals in the modern period of 2002-2013, by adopting LT’s methodology, i.e. determining their incremental explanatory power to the basic earnings-returns relation. I investigate the properties of these signals across time periods (by comparing my results with the 1993 and 2000 papers) and across institutional settings (by comparing results in the U.S. and Singapore). I also created a new, parsimonious hybrid set of signals based on prior results. Finally, I enhance the value relevance by conditioning the analysis on macroeconomic variables. There are six significant findings. Firstly, among LT’s signals, inventory is less value relevant in the modern context, while provisions for doubtful receivables and R&D expenditure are more value relevant, which could indicate a shift towards a services- and knowledge-oriented economy. Secondly, Piotroski’s signals are highly value relevant, evident from the doubling in explanatory power. Thirdly, both LT’s and Piotroski’s signals are less value relevant in Singapore than U.S. Fourthly, my hybrid set of signals performed consistently strong, though slightly weaker than Piotroski’s. Fifthly, a macroeconomic contextual analysis enhanced our results, and was applied to Piotroski’s signals for the first time. Finally, stock returns are better explained by a change in fundamentals over prior 2 years rather than the prior 1 year, as the former is less affected by non-recurring charges.