<p>An efficient market implies that the use of fundamental analysis should not result in excess return, and that any return exceeding the market average can be explained by compensation for risk, accord-ing to The Capital Asset Pricing Model (CAPM). The focus of this study is to test whether the suc-cessful investment strategy developed by Piotroski (2000) generates excess return on American data, after risk adjustment by using Fama & French’s (1993) 3-factor and Carhart’s (1997) 4-factor CAPM. Initially we form stock portfolios based on companies characterized by high book-to-market values, additionally, we divide them into different performance classes by ranking them with Piotroski’s (2000) measure of financial performance, F_SCORE. Furthermore, we measure the actual return which these portfolios generates, using an one- and two-year buy-and-hold strategy, and calculate what theoretical return that is motivated by 3- and 4-factor CAPM, on the same sample. Our results show that Piotroskis (2000) investment strategy generates an average excess return for all the portfo-lios we construct, which cannot be explained by either 3- or 4-factor CAPM.</p>

An efficient market implies that the use of fundamental analysis should not result in excess return, and that any return exceeding the market average can be explained by compensation for risk, accord-ing to The Capital Asset Pricing Model (CAPM). The focus of this study is to test whether the suc-cessful investment strategy developed by Piotroski (2000) generates excess return on American data, after risk adjustment by using Fama &amp; French’s (1993) 3-factor and Carhart’s (1997) 4-factor CAPM. Initially we form stock portfolios based on companies characterized by high book-to-market values, additionally, we divide them into different performance classes by ranking them with Piotroski’s (2000) measure of financial performance, F_SCORE. Furthermore, we measure the actual return which these portfolios generates, using an one- and two-year buy-and-hold strategy, and calculate what theoretical return that is motivated by 3- and 4-factor CAPM, on the same sample. Our results show that Piotroskis (2000) investment strategy generates an average excess return for all the portfo-lios we construct, which cannot be explained by either 3- or 4-factor CAPM.