ISSN: 2450-7741
eISSN: 2300-4460
OAI
DOI: 10.18276/frfu.2016.79-01
Issue archive /
1/2016 (79)
The Importance of Financial Ratios in Predicting Stock Price Trends: A Case Study in Emerging Markets
| Authors: | Thomas Arkan |
| Keywords: | financial ratios stock price |
| Data publikacji całości: | 2016 |
| Page range: | 14 (13-26) |
Abstract
The purpose of this article is to investigate the importance of financial ratios derived from financial statements to predict stock price trends in emerging markets. A statistical examination to the prediction power of 12 financial ratios was tested depending on data of 15 companies distributed on 3 sectors for the years 2005–2014 in the Kuwaiti financial market. An equation to estimate the stock price in each sector was built according to the multiple regression model after eliminating non-effective variables with the STEPWISE method. The results showed that some ratios could give strong positive and significant relationships to stock price behaviour and trends, the most effective ratios on the stock price for the industrial sector are ROA, ROE and net profit ratio. Also the most effective ratio on the stock price for the service sector was the ROA, ROE, P/E and EPS ratio and the same for the investment sector. This study concluded that it could rely on a set of financial ratios for each sector to predict stock price, the decision maker of such investors can rely on the financial analysis presented by the financial ratios when making financial and operational decisions.
Download file
Article file
Bibliography
| 1. | Altman E.I. (1968), Financial Ratios, Discriminant Analysis and the Prediction of Corporate Bankruptcy, “The Journal of Finance” vol. 23, no. 4. |
| 2. | Basu S., Investment performance of common stocks in relation to their price-earnings ratios: a test of the efficient market hypothesis, “Journal of Finance” vol. 32, no. 3. |
| 3. | Beaver, W.H., Beaver W.H. (1966), Financial Ratios as Predictors of Failure, “Journal of Accounting Research” vol. 4, no. 3. |
| 4. | Benninga Simon, (2008), Financial Modeling, 3rd, Massachusetts Institute of Technology. |
| 5. | Block S.B. (1999), A study of financial analysis: practice and theory, “Financial Analysts Journal” vol. 55, no. 4. |
| 6. | Brigham E.F., Ehrhardt M.C. (2005), Financial Management, 11 edition, USA. |
| 7. | Campbell J.Y., Campbell J.Y., Shiller R.J. 1998, Valuation Ratios and the Long-Run Stock Market Outlook, “Journal of Portfolio Management” vol. 24, no. 2. |
| 8. | Campbell J.Y., Shiller R.J. (1988), Stock Prices, Earnings and Expected Dividends, “Journal of Finance” vol. 43, no. 3. |
| 9. | Chen P.F., Zhang G. (2007), How Do Accounting Variables Explain Stock Price Movements? Theory and Evidence, “Journal of Accounting and Economics”, HKUST Business School Research Paper no. 07-02. |
| 10. | Chen S.W., Shen C.H. (2009), Is the Stock Price Higher than that Implied by the Fundamentals?, “International Research Journal of Finance and Economics” vol. 29. |
| 11. | Constand R.L., Freitas L.P., Sullivan M.J. (1991), Factors affecting price earnings ratios and market values of Japanese firms, “Journal Financial Management” vol. 20, p. 4. |
| 12. | Deaves R., Miu P., White C.B. (2008), Canadian stock market multiples and them predictive content, “International Review of Economics and Finance”, vol. 17, no. 3. |
| 13. | Hoover S., Ebrary I. (2006), Stock valuation: an essential guide to Wall Street’s most popular valuation models, New York: McGraw-Hill, cop. |
| 14. | Johnson W.B., Zhao R. (2012), Contrarian Share Price Reactions to Earnings. Surprises, “Journal of Accounting, Auditing & Finance” vol. 27, no. 2. |
| 15. | Koller T, Goedhart M, Wessels D. (2010), Valuation: Measuring and Managing the Value of Companies, 5th ed, John Wiley & Sons, Hoboken. |
| 16. | Kothari S.P., Shanken J. (1997), Book-to-market, dividend yield, and expected market returns: a time series analysis, “Journal of Financial Economics” vol. 44. |
| 17. | Lewellen J. (2004), Predicting Returns with Financial Ratios, “Journal of Financial Economics” vol. 74. |
| 18. | Li-Chin J., Chao-Shin L. (1997), Open-Market Stock repurchase announcements and revaluation of prior accounting information, “The Accounting Review vol. 25, no. 99. |
| 19. | M.-C. Lin A., Lee R.-T., Kao, Chen K.-T. (2011), Stock price movement prediction using representative prototypes of financial reports, ACM Transactions on Management Information Systems (TMIS), vol. 2, no. 3, pp. Article 19, 18 pages, October. |
| 20. | McWilliams J. (1996), Price, earning and P-E ratios, “Financial Analysts Journal” vol. 22. |
| 21. | Murphy J.J. (1999), Technical Analysis of the Financial Markets: A Comprehensive Guide to Trading Methods and Applications (New York Institute of Finance). |
| 22. | Ohlson J.A., Ohlson J.A. (1980), Financial Ratios and the Probabilistic Prediction of Bankruptcy, “Journal of Accounting Research” vol. 18, no. 1. |
| 23. | Penman S.H, (2010), Financial Statement Analysis and Security Valuation, 4th ed, McGraw- Hill, New York. |
| 24. | Penman S.H., Penman S.H. (1996), The Articulation of Price-Earnings Ratios and Market-to-Book Ratios and the Evaluation of Growth, “Journal of Accounting Research” vol. 34, no. 2. |
| 25. | Penman S.H., Richardson S.A., Tun I. (2007), The book-to-price effect in stock returns: Accounting for leverage, “Journal of Accounting Research” vol. 45, no. 2. |
| 26. | Pontiff J., Schall L. (1998), Book-to-market ratios as predictors of market returns, “Journal of Financial Economics” vol. 49. |
| 27. | Ross S.A., Westerfield R.W., Jaffe J., Ku S. (1999), Corporate Finance, McGraw-Hill College. |
| 28. | Schrimpf A., (2010), International stock return predictability under model uncertainty, “Journal of International Money and Finance” vol. 29. |