The return accumulation approach used in studies on accounting-related anomalies cannot be replicated in a practical context because the number and identity of individual observations within a portfolio are assigned within a research context before the accounting information of all firms in the portfolio would actually be available in real time. We explore this issue by re-examining the results in Piotroski (2000) [Value investing: the use of historical financial statement information to separate winners from losers, Journal of Accounting Research, 38 (supplement), 1-44]. We find that the relationship between Piotroski’s fundamental signals and subsequent returns is partly driven by the choice of return accumulation periods. Because the method used in Piotroski is typical of those often employed in the accounting literature, this study suggests that evidence of profitable trading strategies and market inefficiency in the literature is likely to be overstated.

Keywords: Market efficiency; Portfolio formation methodology; Financial statement analysis

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