Stock Returns Predictability Using Financial Ratios in Malaysia
Abstract
Stock return predictability is important to maintain confidence and liquidity in a stock market. The conventional theory on stock price behaviour, the Efficient Market Hypothesis, posits that stock return predictability is not possible. This study considers the Adaptive Market Hypothesis to explain the predictability of stock returns in Malaysia using financial ratios as predictor variables. The Adaptive Market Hypothesis is gaining prominence to explain stock behaviour. However, studies have been mixed and limited. This study contributes to the empirical evidence on the relationship of financial ratios to return of stock in emerging markets, specifically Malaysia. Purposive sampling is employed to select the listed companies from the Malaysia Stock Exchange, which are then filtered based on three criteria to arrive at a sample of 392 companies. For predictor variables, seven financial ratios have been identified for their predictive strength to stock returns. This study employs panel data to formulate the multiple predictive regression. The regression model determined is the fixed effects regression with robust standard error. Results show that the relationship to stock returns is significant for the predictor variables of earnings yield, dividend yield, book-to-market ratio, return on assets, current ratio and assets turnover. The relationship between debt-to-equity ratio and stock returns is not significant. The findings show that financial ratios have predictive strength to stock returns in the Malaysia market. To improve on the explanatory strength, it is suggested for future research to incorporate external factors such as GDP, inflation or other economic factors such as interest and exchange rates.
References
Allozi, N. M., & Obeidat, G. S. (2016). The relationship between the stock return and financial indicators (profitability, leverage): An empirical study on manufacturing companies listed in Amman Stock Exchange. Journal Of Social Sciences (COES&RJ-JSS), 5(3), 408-424.
Anusakumar, S. V., Ali, R., & Wooi, H. C. (2017). The effect of investor sentiment on stock returns: Insight from emerging asian markets. Asian Academy of Management Journal of Accounting & Finance, 13(1).
Anwaar, M. (2016). Impact of firms performance on stock returns (evidence from listed companies of FTSE-100 Index London, UK). Global Journal of Management and Business Research.
Arkan, T. (2016). The importance of financial ratios in predicting stock price trends: A case study in emerging markets. Finanse, Rynki Finansowe, Ubezpieczenia, 79, 13-26.
Astakhov, A., Havranek, T., & Novak, J. (2019). Firm size and stock returns: A quantitative survey. Journal of Economic Surveys, 33(5), 1463-1492.
Bahreini, V., Baghbani, M., & Bahreini, R. (2013). Analysis between financial leverage with the stock price and the operational performance of the accepted companies in Tehran’s stock market. European Online Journal of Natural and Social Sciences: Proceedings, 2(3 (s)), pp-25.
Bekaert, G., & Harvey, C. R. (2017). Emerging equity markets in a globalizing world. Retrieved from SSRN 2344817.
CEIC_Data (2021) Malaysia | Bursa Malaysia: Market Capitalization | Economic Indicators. Retrieved from https://www.ceicdata.com/en/malaysia/bursa-malaysia-market-capitalization/bursa-malaysia-market-capitalization (Accessed: 10 January 2022).
Cevik, E., Kirci Altinkeski, B., Cevik, E. I., & Dibooglu, S. (2022). Investor sentiments and stock markets during the COVID-19 pandemic. Financial Innovation, 8(1), 69.
Chen, C., Zhao, L., Bian, J., Xing, C., & Liu, T. Y. (2019, July). Investment behaviors can tell what inside: Exploring stock intrinsic properties for stock trend prediction. In Proceedings of the 25th ACM SIGKDD International Conference on Knowledge Discovery & Data Mining (pp. 2376-2384).
Dadrasmoghadam, A., & Akbari, S. M. R. (2015). Relationship between financial ratios in the stock prices of agriculture-related companies accepted on the stock exchange for Iran. Research Journal of Fisheries and Hydrobiology, 10(9), 586-591.
Dai, Z., & Zhu, H. (2020). Stock return predictability from a mixed model perspective. Pacific-Basin Finance Journal, 60, 101267.
Din, W.U. (2017). Stock return predictability with financial ratios: Evidence from PSX 100 Index companies. International Journal of Basic Sciences & Applied Research, 6(3), 269–280.
Donnelly, R. (2014). The book-to-market ratio, optimism and valuation. Journal of Behavioral and Experimental Finance, 4, pp. 14–24.
Gunadi, I. G. N. B., Putra, I. G. C., & Yuliastuti, I. A. N. (2020). The Effects of Profitabilitas and Activity Ratio Toward Firms Value With Stock Price as Intervening Variables. International Journal of Accounting & Finance in Asia Pasific (IJAFAP), 3(1), 56-65.
Hadi, S. K., & Ahmad, S. (2021). Investor sentiment effect on stock returns in Saudi Arabia stock market. PalArch's Journal of Archaeology of Egypt/Egyptology, 18(13), 1096-1103.
Hashim, S. L. B. M., & Shahrumzaki, N. I. I. B. (2020). The Impact of Profitability, Leverage and Dividend on the Share Price of Food and Beverage Sector in Malaysia. Global Business & Management Research, 12(4), 535–539.
Hayati, I., Saragih, D. H., & Siregar, S. S. (2020, January). The effect of current ratio, debt to equity ratio and roa on stock prices in sharia based manufacturing companies in Indonesia Stock Exchange. In Proceeding International Seminar Of Islamic Studies (Vol. 1, No. 1, pp. 276-290).
Herawati, A., & Putra, A. S. (2018). The influence of fundamental analysis on stock prices: The case of food and beverage industries. European Research Studies Journal, 21(3), 316-326–326.
Hoang, K. K. (2018). Risky investments: How local and foreign investors finesse corruption-rife emerging markets. American Sociological Review, 83(4), 657-685.
Husna, A., & Satria, I. (2019). Effects of return on asset, debt to asset ratio, current ratio, firm size, and dividend payout ratio on firm value. International Journal of Economics and Financial Issues, 9(5), 50.
Kendrik, K., Mukti, A., Verent, V., Hendriyo, H., Wiyogo, B., & Jamaluddin, J. (2020). The Effect of Current Ratio, Debt to Equity Ratio and Earning per Share on Stock Price. Jurnal Akuntansi, Manajemen dan Ekonomi, 21(4).
Kezdi, G. (2003). Robust standard error estimation in fixed-effects panel models. Retrieved from SSRN 596988.
Kheradyar, S., Ibrahim, I., & Nor, F. M. (2011). Stock return predictability with financial ratios. International Journal of Trade, Economics and Finance, 2(5), 391.
Kohansal, M. R., Dadrasmoghadam, A., Mahjori Karmozdi, K., & Mohseni, A. (2013). Relationship between financial ratios and stock prices for the food industry firms in stock exchange of Iran. World Applied Programming, 3.
Kurniawan, A. (2021). Analysis of the effect of return on asset, debt to equity ratio, and total asset turnover on share return. Journal of Industrial Engineering & Management Research, 2(1), 64-72.
Lawrenz, J., & Zorn, J. (2017). Predicting international stock returns with conditional price-to-fundamental ratios. Journal of Empirical Finance, 43, 159-184.
Le, B. (2019). Working capital management and firm’s valuation, profitability and risk: Evidence from a developing market. International Journal of Managerial Finance.
Lo, A. W. (2004). The adaptive markets hypothesis. The Journal of Portfolio Management, 30(5), 15-29.
Masdupi, E., Tasman, A., & Davista, A. (2018, July). The influence of liquidity, leverage and profitability on financial distress of listed manufacturing companies in Indonesia. In First Padang International Conference On Economics Education, Economics, Business and Management, Accounting and Entrepreneurship (PICEEBA 2018) (pp. 389-394). Atlantis Press.
Musallam, S. R. (2018). Exploring the relationship between financial ratios and market stock returns. Eurasian Journal of Business and Economics, 11(21), 101-116.
Nguyen, T., Nguyen, H., Tran, Q., & Le, Q. (2020). Dividend policy and share price volatility: empirical evidence from Vietnam. Accounting, 6(2), 67-78.
Öztürk, H., & Karabulut, T. A. (2018). The relationship between earnings-to-price, current ratio, profit margin and return: an empirical analysis on Istanbul stock exchange. Accounting and Finance Research, 7(1), 109-115.
Padberg, T. (2017). How to analyse bank financial statements: A concise practical guide for analysts and investors. Harriman House Limited.
Pan, L., & Mishra, V. (2018). Stock market development and economic growth: Empirical evidence from China. Economic Modelling, 68, 661-673.
Pražák, T., & Stavárek, D. (2017). The effect of financial ratios on the stock price development. Interdiscip. Econ. Bus. Res, 43, 3.
Rahman, A. A. A. A. (2017). The relationship between solvency ratios and profitability ratios: Analytical study in food industrial companies listed in Amman Bursa. International Journal of Economics and Financial Issues, 7(2), 86-93.
Sayaseng, S. (2016, June). The challenges in business valuation across emerging markets. In An Enterprise Odyssey. International Conference Proceedings (p. 621). University of Zagreb, Faculty of Economics and Business.
Shittu, I., Masud, A., & Alkali, Y. M. (2016). Price to Earnings Multiple and Stock Selection: Evidence from Malaysian Listed Firms. Journal of Advanced Research in Social and Behavioural Sciences, 3(1), 93–100.
Sukesti, F., Ghozali, I., Fuad, F. U. A. D., Kharis Almasyhari, A., & Nurcahyono, N. (2021). Factors affecting the stock price: The role of firm performance. The Journal of Asian Finance, Economics and Business, 8(2), 165-173.
Uddin, R., Rahman, Z., & Hossain, R. (2013). Determinants of stock prices in financial sector companies in Bangladesh-a study on Dhaka stock exchange (DSE). Interdisciplinary Journal of Contemporary Research in Business, 5(3), 471-480.
Wijaya, J. A. (2015). The effect of financial ratios toward stock returns among Indonesian manufacturing companies. IBuss Management, 3(2).
Woo, K. Y., Mai, C., McAleer, M., & Wong, W. K. (2020). Review on efficiency and anomalies in stock markets. Economies, 8(1), 20.
Anusakumar, S. V., Ali, R., & Wooi, H. C. (2017). The effect of investor sentiment on stock returns: Insight from emerging asian markets. Asian Academy of Management Journal of Accounting & Finance, 13(1).
Anwaar, M. (2016). Impact of firms performance on stock returns (evidence from listed companies of FTSE-100 Index London, UK). Global Journal of Management and Business Research.
Arkan, T. (2016). The importance of financial ratios in predicting stock price trends: A case study in emerging markets. Finanse, Rynki Finansowe, Ubezpieczenia, 79, 13-26.
Astakhov, A., Havranek, T., & Novak, J. (2019). Firm size and stock returns: A quantitative survey. Journal of Economic Surveys, 33(5), 1463-1492.
Bahreini, V., Baghbani, M., & Bahreini, R. (2013). Analysis between financial leverage with the stock price and the operational performance of the accepted companies in Tehran’s stock market. European Online Journal of Natural and Social Sciences: Proceedings, 2(3 (s)), pp-25.
Bekaert, G., & Harvey, C. R. (2017). Emerging equity markets in a globalizing world. Retrieved from SSRN 2344817.
CEIC_Data (2021) Malaysia | Bursa Malaysia: Market Capitalization | Economic Indicators. Retrieved from https://www.ceicdata.com/en/malaysia/bursa-malaysia-market-capitalization/bursa-malaysia-market-capitalization (Accessed: 10 January 2022).
Cevik, E., Kirci Altinkeski, B., Cevik, E. I., & Dibooglu, S. (2022). Investor sentiments and stock markets during the COVID-19 pandemic. Financial Innovation, 8(1), 69.
Chen, C., Zhao, L., Bian, J., Xing, C., & Liu, T. Y. (2019, July). Investment behaviors can tell what inside: Exploring stock intrinsic properties for stock trend prediction. In Proceedings of the 25th ACM SIGKDD International Conference on Knowledge Discovery & Data Mining (pp. 2376-2384).
Dadrasmoghadam, A., & Akbari, S. M. R. (2015). Relationship between financial ratios in the stock prices of agriculture-related companies accepted on the stock exchange for Iran. Research Journal of Fisheries and Hydrobiology, 10(9), 586-591.
Dai, Z., & Zhu, H. (2020). Stock return predictability from a mixed model perspective. Pacific-Basin Finance Journal, 60, 101267.
Din, W.U. (2017). Stock return predictability with financial ratios: Evidence from PSX 100 Index companies. International Journal of Basic Sciences & Applied Research, 6(3), 269–280.
Donnelly, R. (2014). The book-to-market ratio, optimism and valuation. Journal of Behavioral and Experimental Finance, 4, pp. 14–24.
Gunadi, I. G. N. B., Putra, I. G. C., & Yuliastuti, I. A. N. (2020). The Effects of Profitabilitas and Activity Ratio Toward Firms Value With Stock Price as Intervening Variables. International Journal of Accounting & Finance in Asia Pasific (IJAFAP), 3(1), 56-65.
Hadi, S. K., & Ahmad, S. (2021). Investor sentiment effect on stock returns in Saudi Arabia stock market. PalArch's Journal of Archaeology of Egypt/Egyptology, 18(13), 1096-1103.
Hashim, S. L. B. M., & Shahrumzaki, N. I. I. B. (2020). The Impact of Profitability, Leverage and Dividend on the Share Price of Food and Beverage Sector in Malaysia. Global Business & Management Research, 12(4), 535–539.
Hayati, I., Saragih, D. H., & Siregar, S. S. (2020, January). The effect of current ratio, debt to equity ratio and roa on stock prices in sharia based manufacturing companies in Indonesia Stock Exchange. In Proceeding International Seminar Of Islamic Studies (Vol. 1, No. 1, pp. 276-290).
Herawati, A., & Putra, A. S. (2018). The influence of fundamental analysis on stock prices: The case of food and beverage industries. European Research Studies Journal, 21(3), 316-326–326.
Hoang, K. K. (2018). Risky investments: How local and foreign investors finesse corruption-rife emerging markets. American Sociological Review, 83(4), 657-685.
Husna, A., & Satria, I. (2019). Effects of return on asset, debt to asset ratio, current ratio, firm size, and dividend payout ratio on firm value. International Journal of Economics and Financial Issues, 9(5), 50.
Kendrik, K., Mukti, A., Verent, V., Hendriyo, H., Wiyogo, B., & Jamaluddin, J. (2020). The Effect of Current Ratio, Debt to Equity Ratio and Earning per Share on Stock Price. Jurnal Akuntansi, Manajemen dan Ekonomi, 21(4).
Kezdi, G. (2003). Robust standard error estimation in fixed-effects panel models. Retrieved from SSRN 596988.
Kheradyar, S., Ibrahim, I., & Nor, F. M. (2011). Stock return predictability with financial ratios. International Journal of Trade, Economics and Finance, 2(5), 391.
Kohansal, M. R., Dadrasmoghadam, A., Mahjori Karmozdi, K., & Mohseni, A. (2013). Relationship between financial ratios and stock prices for the food industry firms in stock exchange of Iran. World Applied Programming, 3.
Kurniawan, A. (2021). Analysis of the effect of return on asset, debt to equity ratio, and total asset turnover on share return. Journal of Industrial Engineering & Management Research, 2(1), 64-72.
Lawrenz, J., & Zorn, J. (2017). Predicting international stock returns with conditional price-to-fundamental ratios. Journal of Empirical Finance, 43, 159-184.
Le, B. (2019). Working capital management and firm’s valuation, profitability and risk: Evidence from a developing market. International Journal of Managerial Finance.
Lo, A. W. (2004). The adaptive markets hypothesis. The Journal of Portfolio Management, 30(5), 15-29.
Masdupi, E., Tasman, A., & Davista, A. (2018, July). The influence of liquidity, leverage and profitability on financial distress of listed manufacturing companies in Indonesia. In First Padang International Conference On Economics Education, Economics, Business and Management, Accounting and Entrepreneurship (PICEEBA 2018) (pp. 389-394). Atlantis Press.
Musallam, S. R. (2018). Exploring the relationship between financial ratios and market stock returns. Eurasian Journal of Business and Economics, 11(21), 101-116.
Nguyen, T., Nguyen, H., Tran, Q., & Le, Q. (2020). Dividend policy and share price volatility: empirical evidence from Vietnam. Accounting, 6(2), 67-78.
Öztürk, H., & Karabulut, T. A. (2018). The relationship between earnings-to-price, current ratio, profit margin and return: an empirical analysis on Istanbul stock exchange. Accounting and Finance Research, 7(1), 109-115.
Padberg, T. (2017). How to analyse bank financial statements: A concise practical guide for analysts and investors. Harriman House Limited.
Pan, L., & Mishra, V. (2018). Stock market development and economic growth: Empirical evidence from China. Economic Modelling, 68, 661-673.
Pražák, T., & Stavárek, D. (2017). The effect of financial ratios on the stock price development. Interdiscip. Econ. Bus. Res, 43, 3.
Rahman, A. A. A. A. (2017). The relationship between solvency ratios and profitability ratios: Analytical study in food industrial companies listed in Amman Bursa. International Journal of Economics and Financial Issues, 7(2), 86-93.
Sayaseng, S. (2016, June). The challenges in business valuation across emerging markets. In An Enterprise Odyssey. International Conference Proceedings (p. 621). University of Zagreb, Faculty of Economics and Business.
Shittu, I., Masud, A., & Alkali, Y. M. (2016). Price to Earnings Multiple and Stock Selection: Evidence from Malaysian Listed Firms. Journal of Advanced Research in Social and Behavioural Sciences, 3(1), 93–100.
Sukesti, F., Ghozali, I., Fuad, F. U. A. D., Kharis Almasyhari, A., & Nurcahyono, N. (2021). Factors affecting the stock price: The role of firm performance. The Journal of Asian Finance, Economics and Business, 8(2), 165-173.
Uddin, R., Rahman, Z., & Hossain, R. (2013). Determinants of stock prices in financial sector companies in Bangladesh-a study on Dhaka stock exchange (DSE). Interdisciplinary Journal of Contemporary Research in Business, 5(3), 471-480.
Wijaya, J. A. (2015). The effect of financial ratios toward stock returns among Indonesian manufacturing companies. IBuss Management, 3(2).
Woo, K. Y., Mai, C., McAleer, M., & Wong, W. K. (2020). Review on efficiency and anomalies in stock markets. Economies, 8(1), 20.
Published
2023-09-01
How to Cite
YOON MEI, Chin et al.
Stock Returns Predictability Using Financial Ratios in Malaysia.
Asian Journal of Accounting and Finance, [S.l.], v. 5, n. 3, p. 22-32, sep. 2023.
ISSN 2710-5857.
Available at: <https://myjms.mohe.gov.my/index.php/ajafin/article/view/23853>. Date accessed: 04 dec. 2024.
Section
Articles
