THE PREDICTION OF STOCK RETURNS USING FINANCIAL STATEMENT INFORMATION

We examine the profitability of a trading strategy which is based on a logit model designed to predict the sign of subsequent twelve-month excess return, from accounting ratios. Over the 1978-1988 period, the average annual excess return produced by the trading strategy ranges between 4.3% and 9.5%, depending on the specific measure of excess return and weighting scheme involved. However, our implementation of the Ou and Penman (1989) trading strategy in the 1978-1988 period, which is based on a logit model that predicts subsequent unexpected earnings-per-share from accounting ratios, does not earn excess returns.