Article2011

Stock Return Predictability with Financial Ratios

71 citations0/0 files storedInternational Journal of Trade Economics and Finance

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Financial Markets and Investment Strategies Financial Analysis and Corporate Governance Financial Reporting and Valuation Research

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.

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References

1992The Cross-Section of Expected Stock Returns 1973Risk, Return, and Equilibrium: Empirical Tests 1970Efficient Capital Markets: A Review of Theory and Empirical Work 1988Dividend yields and expected stock returns 1995Size and Book-to-Market Factors in Earnings and Returns 1977INVESTMENT PERFORMANCE OF COMMON STOCKS IN RELATION TO THEIR PRICE‐EARNINGS RATIOS: A TEST OF THE EFFICIENT MARKET HYPOTHESIS 1988Stock Prices, Earnings, and Expected Dividends 1999Predictive regressions

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