Fundamental Analysis and the Prediction of Earnings

This paper takes fundamental analysis research beyond the spatial and temporal bounds of previous studies. Weinvestigate how detailed financial statement data enter the decisions of market makers by examining how currentchanges in the fundamental signals chosen can provide information on subsequent earnings changes. Usingglobal data from 1990 to 2000, we extend the body of research using fundamental signals for prediction of futureearnings changes. Contextual factors that may influence this predictive ability are also investigated. Resultsindicate that the fundamental signals are significant predictors of both short- and long-term future earningschanges. Contextual factors that include prior earnings news, industry membership, macroeconomic conditionsand country of incorporation are all demonstrated to influence this relationship. Research results provideevidence to support the use of fundamental analysis.