Can Fundamental Analysis Provide Relevant Information for Understanding the Underlying Value of a Company?

This chapter investigates the relevance of fundamental analysis (FA) for companies listed on the Euronext 100 index. Can FA provide relevant information that increases understanding of the underlying value of a company? This study leverages an FA strategy to select shares in a portfolio that can systematically yield significant, positive excess market buy-and-hold returns, 1 and 2 years after the portfolio formation. Using annual financial data available from 2000 to 2016, this analysis calculates three scores applied to construct the portfolios: the L-score, F-score, and PEIS. These insights inform investors’ potential uses of fundamental signals (scores) to obtain abnormal returns. The results show that portfolios formed with high versus low scores earn 1- and 2-year abnormal returns between 2000 and 2016. This chapter contributes to scarce accounting research in European capital markets by furthering understanding of the possibility of mispriced securities.