Using Fundamental Analysis to Assess Earnings Quality: Evidence from the Center for Financial Research and Analysis

Journal of Accounting, Auditing & Finance (Fall 2001, Volume 16, No. 4: 273 ! 295)

32 Pages Posted: 16 Oct 2000 Last revised: 3 Jun 2016

See all articles by Scott Whisenant

Scott Whisenant

University of Kansas

Patricia M. Fairfield

Georgetown University - Department of Accounting and Business Law

Multiple version iconThere are 2 versions of this paper

Date Written: October 1, 2000

Abstract

We document post-event negative abnormal returns to the (implicit) sell recommendations of a group of fundamental analysts. We also find statistically significant deterioration in the financial performance of the identified firms in the year after the recommendations. Together the results are consistent with the claim of fundamental analysts that they are able to identify firms that are successfully masking operational problems with aggressive accounting. The sample in this study comprises 373 firms identified over a four-year period by the Center for Financial Research and Analysis (CFRA). The CFRA offers to subscribers a monthly report identifying approximately ten firms which CFRA claims are experiencing operational problems and particularly those that employ unusual or aggressive accounting practices to mask the problems. The CFRA analysts rely on traditional techniques of fundamental analysis, including mechanical screens and more time-consuming analyses of footnotes and other public disclosures. Their data sources include only publicly available information, primarily SEC filings. We conclude that CFRA's apparent success in identifying firms with deteriorating performance provides evidence about the usefulness of traditional financial statement analysis. The results also provide a strong rationale for future research to identify specific techniques of fundamental analysis that can be employed to detect operational problems masked by aggressive accounting practices.

Keywords: Fundamental analysis, market efficiency, contextual analysis, off-financial-statement data

JEL Classification: G29, G14, M41

Suggested Citation

Whisenant, Scott and Fairfield, Patricia M., Using Fundamental Analysis to Assess Earnings Quality: Evidence from the Center for Financial Research and Analysis (October 1, 2000). Journal of Accounting, Auditing & Finance (Fall 2001, Volume 16, No. 4: 273 ! 295), Available at SSRN: https://ssrn.com/abstract=239822 or http://dx.doi.org/10.2139/ssrn.239822

Scott Whisenant (Contact Author)

University of Kansas ( email )

Capitol Federal Hall, #4101
1654 Naismith Dr.
Lawrence, KS 66045
United States
785-864-7577 (Phone)

HOME PAGE: http://https://business.ku.edu/scott-whisenant

Patricia M. Fairfield

Georgetown University - Department of Accounting and Business Law ( email )

McDonough School of Business
Washington, DC 20057
United States
202-687-4583 (Phone)
202-687-4031 (Fax)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
3,254
Abstract Views
10,606
rank
4,533
PlumX Metrics