Piotroski's Fscore under varying economic conditions

Piotroski’s Fscore has become increasingly important to investment managers and analysts as a simple measure of a company’s financial strength. However, how it changes over time, and in particular how it reacts under different economic conditions, has not been considered until now. Macroeconomic conditions and the business cycle affect corporate valuations via stock prices. They also affect corporate liquidity, cash flow, profitability, efficiency, financing, capital structure, and thus Fscores. The Fscore is currently used as if it gives similar results in all economic states, but this is not the case. While macroeconomic conditions strongly affect the aggregate Fscore, the effect of particular variables changes greatly depending on the stage of the economic cycle. During contractionary episodes, monetary and macro-economic factors become much more critical and outweigh firm-level factors in determining Fscore values. Investors should, therefore, be particularly cautious in applying the Fscore equally during contractions as during expansionary periods.