Application of the Altman Z-EM-Score and piotroski F-Score to the Johannesburg Securities Exchange as short selling instrument

Abstract

This research investigated the effectiveness of the Altman Z-EM-Score and the Piotroski F-Score as tools that can be used to identify stocks on the JSE that may be shorted for an abnormal return. A fundamental assumption of the efficient market hypothesis is that an abnormal return cannot be made in a market because market prices fully reflect all available information. Several studies on short selling affirmed that abnormal returns could be earned by shorting assets that are in decline. However, there has been no published work that has been done on the Johannesburg Stock Exchange (JSE) on short selling instruments. An empirical study of shares that are listed on the main board of the JSE from 2005 to 2015 was done for the purpose of this research. The study found over the period that using the Piotroski F-Score as a short selling strategy generated an average of 6.56 percent market adjusted annual return between 2005 and 2014. Although the Altman Z-EM-Score made an average annual return that underperformed the market during the study period, however, the result was not statistically significant. The research concluded that compared to the Altman Z-EM-Score the Piotroski F-Score is more effective as short selling instrument on the JSE.