Return to Fundamentals

Abstract

Up to 25 years ago, fundamental analysis was the primary focus of research in investment analysis. Correspondingly, financial accounting re-search embraced a measurement perspective. Fundamental analysis involves the determination of the value of securities from available information, with a particular focus on accounting information. The measurement approach in accounting evaluates accounting concepts as determinants of asset values that are measures of investment worth. Both endeavors are directed toward a basic, practical question: How does one assess how much to pay for a stock and what is the role of accounting in that assessment? During the past 25 years, research in academia has been otherwise directed. Both traditional fundamental analysis and accounting measurement theory have been judged as ad hoc and lacking the theoretical foundations required of rigorous economic analysis. “Modern finance ” established those foundations but has not brought the theory to the question of fundamental analysis. Rather, it has been preoccupied with relative pricing, an under-

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