Clement C. M. Ajekwe¹, Adzor Ibiamke^1,

This study examines whether the application of an accounting fundamental strategy to select stocks of a portfolio can systematically yield significant and positive excess market buy-and-hold returns after one year of portfolio formation. Using financial statement information and the “direct approach”, multiple logit models were developed to predict the year-ahead returns. The coefficient estimates of these models were used to generate Pr measures which were used to formulate investment strategies. Specifically, the investment strategy involved buying stocks with high Pr values and selling stocks with low Pr values was examined. The study found that eleven accounting ratios predict stock returns accurately in 76.6% of the cases. This robust ability to accurately predict stock returns is evidence that conducting fundamental analysis and taking investment positions on the basis of Pr values can be a fruitful strategy for investors in Nigeria. Thus, the study recommends that investors evaluate their investments in equity for 12 months before making a buy or sell decision using a Pr strategy to avoid loses or missing opportunities.

financial statement analysis, future returns, investment strategy, Logit regression, Nigeria