Title: Using fundamental analysis of financial information to explain unexpected market behaviour

Authors: Daniel R. Brickner, Charles A. Brown, Mark Myring

Addresses: Department of Accounting and Finance, Eastern Michigan University, 406 Owen Building, Ypsilanti, MI 48197, USA. ' Sam and Irene Black School of Business, Penn State Erie, The Behrend College, 5101 Jordan Road, Erie, PA 16563, USA. ' Miller College of Business, Ball State University, 200 W. University Avenue, Muncie, IN 47306, USA

Abstract: This paper extends prior research in the areas of fundamental analysis and the information content of losses in an effort to explain unexpected market behaviour in certain circumstances. Specifically, we develop expectations related to the relevance of fundamental financial signals to explain firm returns in cases in which earnings do not serve as an effective summary measure for valuation purposes. In such settings, we posit that market participants seek additional information sources, such as fundamental signals, to assist in firm valuation. Our results indicate that although earnings do not explain returns for firms sustaining losses, fundamental financial signals are value-relevant. Upon segregating our sample further, we find that the fundamental signals are significant in explaining returns for firms in which yearly returns appear to belie the direction of the firms| earnings. Taken together, these results support our expectations regarding the value-relevance of fundamental financial signals in certain settings.

Keywords: fundamental analysis; negative earnings; earnings-return relation; capital markets; financial information; unexpected behaviour; market behaviour; firm valuation; financial signals; earnings; returns.

DOI: 10.1504/GBER.2007.015100

Global Business and Economics Review, 2007 Vol.9 No.4, pp.366 - 380

Published online: 13 Sep 2007 *

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