Stock Return Predictability with Financial Ratios

Abstract

Abstract-This paper studies whether financial ratios can predict stock returns for the period from January 2000 to December 2009 in Malaysia stock exchange. We select three financial ratios include dividend yield (DY), earning yield (EY) and book-to-market ratio (B/M) that have been documented to predict stock returns. This study applies generalized least squares (GLS) techniques to estimate the predictive regressions in form of simple and multiple models of panel data sets. The obtained results reveal that the financial ratios can predict stock return, as the B/M has the higher predictive power than DY and EY respectively. Furthermore, the financial ratios are able to enhance stock return predictability when the ratios are combined in the multiple predictive regression model. Index Terms-Financial ratios, Stock return predictability, Predictive regression, Malaysia stock exchange.

Exploring the Relationship between Financial Ratios and Market Stock Returns

“…They find that Japanese financial ratios as a predictor of market stock return is weaker than US financial ratios i.e., price to dividend ratio and price to earnings ratio. Kheradyar et al's (2011) investigate the role of financial ratios as predictors of market stock return. Using a panel data of 100 listed companies in Bursa Malaysia from 2000 to 2009.…”

“…Lewellen (2004) argue that financial ratios are used as a tool of predicting for market stock returns. Bower and Bower (1969), Lewellen (2004), Shafana, Fathima, and Inunjariya (2013), Kheradyar, Ibrahim, andMat Nor (2011), andZahir (1992) also argue that financial ratios consider as an effective tools in predicting stock returns with the lowest level of risks as compared to historical returns, observations, movements, and other alternative variables. Chen and Shen (2009), Lewellen (2004) and Shafna et al's (2013) state that the most three effective and useful financial ratiosin predicting the ability of stock returns are dividend yield ratio, book to market value ratio, and earning yield ratio among the most respected ratios.…”

The Relationship Between Earnings-to-Price, Current Ratio, Profit Margin and Return: An Empirical Analysis on Istanbul Stock Exchange

“…Similarly, Shen (2000 found high price earnings ratios have been followed by negative stock returns in the short and the long-run in S&P Index. Kheradyar, Ibrahim and Nor (2011), studied stock return predictability with financial ratios. The study is applied in the Malaysia stock exchange for the period between January 2000 and December 2009.…”

Profitability, Earnings Per Share on Stock Return with Size as Moderation

“…Research conducted by Kheradyar et al (2011) find that financial ratios can be used to predict stock returns on the Malaysia Stock Exchange in the period of January 2000 to December 2009. While Suteja and Seran (2015) show that ROE, DER, NPM, inflation, exchange rate and interest rate provide a positive influence on stock returns of the automotive industry and components listed on the IDX in the period of 2009.…”