Separating Winners from Losers: Composite Indicators Based on Fundamentals in the European Context

Our work tests the usefulness of score measures based on fundamental signals in an out-of-sample study during the past two decades. While previous research, primarily focused on the US, demonstrates that fundamental signals derived from financial statements allow for future abnormal stock returns, our European sample documents that Xue-Zhang’s FSCORE2 and Wahlen-Wielandʼs PEIS do not serve as a source of market anomalies. By contrast, other fundamental signals—Piotroski’s FSCORE and Mohanram’s GSCORE—still allow for abnormal returns in our sample and period. We also contribute to the market efficiency debate by documenting the role of idiosyncratic volatility, transaction costs and noise trader risk in the persistence of market anomalies, supporting the existence of limits to arbitrage for these investment strategies.