Should Investors Focus Their Attention on the Japanese Financial Statement?

Abstract

Local and overseas investors have a high interest in the mature and developed Japanese stock market environment. Since some financial information is private information and hard to collect, published financial statements may be the only effective way for investors to better understand Japanese firm. However, few articles investigate the fundamental analysis of Japanese financial statements. This study aims to raise investors’ attention on how to improve their investment performance by using fundamental analysis on the Japanese financial statement. In addition, this study can provide valuable contribution to global researchers by improving some aspects of fundamental analysis methodologies. In this study, we use the cross-sectional model (logit model) to test the relationship between firms’ stock price (one-year-ahead earnings increase) and massive of variables picked from financial statements, and we then develop two types of firm valuation models for predicting stock returns, which is suitable for the Japanese market. Furthermore, we construct three kinds of investment portfolios based on the valuation models, and we find some meaningful ones among those, thus lead to better trading strategies. We find that there is a potential for making abnormal profits by distinguishing between undervalued and overvalued stocks, and forecasting one-year-ahead earnings changes. We also find that there is a relatively higher potential for making abnormal profits by combining the results of two different models (cross-sectional and logit model), which confirm that there is a modeling synergy effect between the trading strategies. The results of further analysis show that alternative trading strategies and subsample analysis in some aspects can increase trading profitability. Our methods and findings may inspire both investor and researchers’ enthusiasm for fundamental analysis based on financial statements.