Business | Marketing


Glenn N. Pettengill


Value investing strategies seek to find securities that have unfairly “beaten down” by the market and which will outperform as the market corrects. Academic studies have shown that value securities, as identified by high book-to-market ratios or low price-to-earnings ratios, do outperform the market on a risk-adjusted basis. But individual investors trying to exploit the value premium face the potential of the “value trap,” investing in securities with low book-to-market ratios that are in serious financial difficulties and will not outperform. Piotroski’s (2000) methodology provides a potential solution to this dilemma by providing a screen based on accounting data to find “true” value securities. This screening method was effective in Piotroski’s sample period, but Woodley, Jones and Reburn (2011) find the method to be ineffective in a later sample period. This paper investigates two possible explanations as to why the Piotroski screen lost effectiveness. We find that a January seasonal in value securities remains strong, but that it has always worked against the effectiveness of Piotroski’s screen. We do attribute the recent failure of the Piotroski screen to a radical shift in the relationship between security returns and the screening variable used by Piotroski. A single variable continues to identify value securities with high future returns, but the impact of this variable is offset by the shift in the relationship between the other screening variables and returns.