Forecasting financial performance using the FSCORE

This study examines whether the industry effect variables can be used to detect investable high book-to-market firms that are neglected by the classic FSCORE method. Industry winners in the neglected firms' cluster are called Underdogs. While the FSCORE method takes a financial picture of the high book-to-market firms, the industry effects variables identify the standing of the firm’s performance relative to its peers. When industry effects are taken into consideration in combination with the FSCORE, a comprehensive fundamental analysis process is established. Using the Generalized Method of Moments framework, the direction, and strength of the relationship between the industry effects variables and future returns are estimated. Results show that firms with an FSCORE above the industry average earn approximately 8% higher returns compared to others. In addition, the industry winners method can separate future winners and losers in the neglected firms' cluster, with the Underdog firms producing approximately 6% higher 12-month market-adjusted returns compared to others. The industry effects variables increase the number of investable firms by approximately 90%.


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Citation Formats
A. G. İRGE, “Forecasting financial performance using the FSCORE,” M.S. - Master of Science, Middle East Technical University, 2022.