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Research Journal of Finance and Accounting ISSN 2222-1697 (Paper) ISSN 2222-2847 (Online) Vol 3, No 10, 2012
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Financial Ratios and Stock Return Predictability (Evidence from Pakistan)
Muhammad Bilal Khan Faculty of Administrative Sciences Air University Islamabad Tel: +92-334-8819057 E-mail: mbilalkhan88@yahoo.com Sajid Gul (Corresponding Author) Faculty of Administrative Sciences Air University Islamabad Mardan 23200 KPK Pakistan Tel: +92-332-8102955 *E-mail: sajidali10@hotmail.com Shafiq Ur Rehman Lecturer University of Malakand, Pakistan Tel: +92-333-9842005 E-mail:shafiquol@hotmail.com Nasir Razzaq PhD Scholar SZABIST Islamabad Tel: +92-336-5505398 E-mail: master_nasir18@yahoo.com Ali Kamran Institute of Management Sciences Peshawar Tel:+92-334-8808095 E-mail:alikamran.pk@gmail.com Abstract The purpose of this research article is to investigate the ability of earning yield (EY), dividend yield (DY) and bookto-market ratio (B/M), to predict stock returns. The sample of the study consists of 100 non-financial companies listed in the “Karachi Stock Exchange”. The duration of the study is 7 years from 2005 to 2011. To find whether EY, DY and B/M ratios can predict stock returns we have used generalized least square and panal data models. The results indicate that DY and EY ratios has direct positive association with stock return where as B/M ratio has significant negative relationship with stock return. Therefore we can say that the above mentioned ratios are able to predict stock returns, furthermore it can be seen that as compare to dividend yield and earning yield the ratio of book to market has the highest predictive power. Moreover when we combine these financial ratios the predictability of stock returns will enhance. Keywords: Financial ratios, Stock return, Karachi Stock Exchange, Dividend Yield, Earning Yield. 1. Introduction Stock Market plays a very significant role in the economic growth of a country. According to A. Schrimpf (2010)
www.iiste.org
Financial Ratios and Stock Return Predictability (Evidence from Pakistan)
Muhammad Bilal Khan Faculty of Administrative Sciences Air University Islamabad Tel: +92-334-8819057 E-mail: mbilalkhan88@yahoo.com Sajid Gul (Corresponding Author) Faculty of Administrative Sciences Air University Islamabad Mardan 23200 KPK Pakistan Tel: +92-332-8102955 *E-mail: sajidali10@hotmail.com Shafiq Ur Rehman Lecturer University of Malakand, Pakistan Tel: +92-333-9842005 E-mail:shafiquol@hotmail.com Nasir Razzaq PhD Scholar SZABIST Islamabad Tel: +92-336-5505398 E-mail: master_nasir18@yahoo.com Ali Kamran Institute of Management Sciences Peshawar Tel:+92-334-8808095 E-mail:alikamran.pk@gmail.com Abstract The purpose of this research article is to investigate the ability of earning yield (EY), dividend yield (DY) and bookto-market ratio (B/M), to predict stock returns. The sample of the study consists of 100 non-financial companies listed in the “Karachi Stock Exchange”. The duration of the study is 7 years from 2005 to 2011. To find whether EY, DY and B/M ratios can predict stock returns we have used generalized least square and panal data models. The results indicate that DY and EY ratios has direct positive association with stock return where as B/M ratio has significant negative relationship with stock return. Therefore we can say that the above mentioned ratios are able to predict stock returns, furthermore it can be seen that as compare to dividend yield and earning yield the ratio of book to market has the highest predictive power. Moreover when we combine these financial ratios the predictability of stock returns will enhance. Keywords: Financial ratios, Stock return, Karachi Stock Exchange, Dividend Yield, Earning Yield. 1. Introduction Stock Market plays a very significant role in the economic growth of a country. According to A. Schrimpf (2010)
References: 5 Research Journal of Finance and Accounting ISSN 2222-1697 (Paper) ISSN 2222-2847 (Online) Vol 3, No 10, 2012