An Empirical Test of Fundamental Analysis in India

Fundamental analysis examines the relation between financial statement data and returns. Previous studies show a link between fundamental signals (which include ratios and other financial performance measures) and returns in the US capital markets. This study extends this line of research by examining the relation between fundamental signals and returns in India. Indian accounting standards and capital markets differ significantly from those in the US. Using the methodology developed by Lev and Thiagarajan (1993), we examine the relationship between these financial measures and returns in India. Our results reveal a significant relationship between fundamental signals and returns in India, suggesting that investors in Indian stock markets find fundamental signals relevant in making investment decisions. Comparison of results obtained using Indian data to those studies based in the US provides insight into the differences between the two countries.