Financial Ratios and Stock Return Predictability

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) there is significant economic aftermath of the existence of stock return predictability. S. Kheradyar et al, (2011), â€Å"The Analytics of Economic Time Series†, states that in stocks market share prices move randomly i. e. on certain day share prices are like to go dow n as they were like to up. Such random behavior worried some of the financial economists and followed by further research. Hence such random movement of share prices lead to a hypothesis called Random Walk Hypothesis.Random walk hypothesis suggest that it is difficult to predict share prices because stock prices evolved, now it will be showing upward trend but after some time such might be showing downward trend. Hence predicting 100% accuracy of stock return is almost impossible. In contrast to Random Walk Behavior is efficient market hypothesis. According to efficient market hypothesis share prices are fairly priced in the stock market or prices of stock demonstrates information in the market is widely and equally available to all and no one in the market can outperform or can beat the market.With the passage of time researchers tries to find out most accurate variables for predicting stock prices, some were tend towards financial and some were towards profitability ratios i. e. b ook to market ratio, price to earnings ratio, 1 Research Journal of Finance and Accounting ISSN 2222-1697 (Paper) ISSN 2222-2847 (Online) Vol 3, No 10, 2012 www. iiste. org dividend yield, etc some were tend towards cash flow ratios like price to cash flow ratio, cash burn ratio, etc and some focused on macroeconomic variable like interest rate, law and order situation and inflation rate etc.In this research article we have investigated 3 above mentioned ratios to determine whether they predict stock returns. This research study has used the stock return and the above mentioned financial ratios association at two samples as the foundation for the formulation of Eight hypotheses. On the grounds of their appropriate regression models the eight hypotheses are divided into two sets. In this study we have used the two models of simple and multiple regressions to apply Predictive regression; it is an important tool for predicting stock returns. A set of panal data is used for the formulat ion of these two models.For tackling the problem of heteroskedasticity and non-normality distributed residuals, we applied generalized least squares method. 2. Literature Review Campbell and Shiller (1988) stated in their study that as dividend yield has the ability to confine expected return and expectation about growth in dividend yield so dividend yield is good predictor of stock return. Chan, L. Hamao, Y. Yakonishok, J. (1991), found that in Japanese market fundamental variables like dividend yield, price to earnings ratio, book to market ratio and firm’s size have significant impact on expected earning/returns of stocks.They notify that there is indirect relationship between earning yield and stocks returns in Japan. In comparison of the size of the firm and earning yield, B/M and dividend yield (cash flow yield) are significantly related with returns of stocks. They further added that an important variable both economically and statistically is book to market ratio and this need to be observe because either the afterward half of the sample is judged or for the first time test is applied the book to market ratio shows it continuation. Mukerji, S. Dhatt, M. Kim, Y. 1997), on Korean Stock market for a period of 1982-1992 establish a direct relationship between return of stocks and D/E, S/P and B/M, moreover an indirect relationship between size of firm and return of stocks. They demonstrated that P/E ratio is less trustworthy indicator than B/M and S/P. Beta is a week proxy for assessment of risk when compare with debt to equity ratio. B/M and S/P are responsible for the direct relationship between return of stocks and debt to equity. However a P/E and B/M ratio becomes the base for indirect relationship between return of stocks and size of the firm.Kothari and Shanken (1997) found for US market that dividend yield and book to market ratios have dependable proof for expected real return over a period 1926-1991, and there lies a track of time series v ariations. Pontiff and Schall (1998) stated that as for predicting power is concerned book to market ratio has some predictability power for predicting stock returns. Lewellen (2002) conducted his study in US he found that predictability power of dividend yield for predicting stock returns is more than P/E and B/M ratios.Ang, A. , and Bekaert, G. , (2006), in their studies tried to forecast interest rate and stock returns with the help of predictive power of dividend yield. They found for short term forecasting, dividend yield predictive power is more than the long term forecasting. But as for the expected growth of cash flow prediction is concerned than dividend yield is a good predictive variable. Akyol, A. (2006), â€Å"analyzed the effect of firm’s size, beta, and book-to-market value on the stock returns in Istanbul stock exchange.He used data from July 1993 to December 2005 for Istanbul Stock Exchange and used Fama and French (1992) methodology to construct portfolios represented accurately by size-beta and then size-book-to-market, he found that book to market and Beta of a firms have no effect on the stock return’s in Istanbul stock exchange. Size of the firm was the only variable which was negatively related to the stock returns in Istanbul stock exchange. He also found that book to market, size and beta is not related with January effects. Hjalmarsson, E. (2004), in his study tried to find out Global stock returns predictability.He took twenty thousand monthly observation form forty international stock markets. In which 24 were of developed economy and 16 were of developing economy. However his study showed that dividend yield and price to earnings ratio has little power of predictability and defends his conclusion by adding that international result is showing deviation from traditional view because the method use internationally may not count for determination of variables. 2. 1 Hypotheses H1: return of stock and DY has no associatio n in time (t) and (t-1) respectively in sample one.H2 return of stock and EY has no association in time (t) and (t-1) respectively in sample one. H3: return of stock and B/M has no association in time (t) and (t-1) respectively in sample one. H4: return of stock and DY has no association in time (t) and (t-1) respectively in sample two. H5: return of stock and EY has no association in time (t) and (t-1) respectively in sample two. H6: return of stock and B/M has no association in time (t) and (t-1) respectively in sample two. 2 Research Journal of Finance and Accounting ISSN 2222-1697 (Paper) ISSN 2222-2847 (Online)Vol 3, No 10, 2012 ww. iiste. org H7: return of stock and DY, EY, B/M combination has no association in time (t) and (t-1) respectively in sample one. H8: return of stock and DY, EY, B/M combination has no association in time (t) and (t-1) respectively in sample two. 3. Research Methodology In order to check predictability power of earning yield, dividend yield and book t o market ratios for predicting stock returns the study has taken a sample of 100 firms for a period of 2005-2011. We have applied certain screening criteria’s for companies to be included in the sample.First, the firm must be listed on the KSE before Jan 1st 2005. 2nd, for more than twelve months a stock must not be deferred. 3rd, for the study period of seven years a company stock must not be delisted. 4th, data must be available for all sample firms and variables. Finally, for a period of more than twelve months the dividend yield of firms must not be zero. The study has divided the selected firms into two equal samples, which will reduce the effects of random sampling errors and for the predictive regression two samples produce different estimation.The study is based on secondary data, which is collected from, â€Å"State Bank of Pakistan†, company’s annual reports, business recorder and from â€Å"Karachi stock exchange†. Following S. Kheradyar et al, (2011) this study includes stock returns as dependent variable while dividend yield, earning yield and B/M ratios has been taken as independent variables. 4. Measurement of Variables 4. 1 Stock Return Following Lewellen (2001) and S. Kheradyar et al, (2011) we have used stock return as dependent variable.Stock return is measured by dividing capital gain along with dividend per share on market price per share. Following is the formula for stock returns. SRi = DPs + capital gain/market price 4. 2 Book to Market Ratio For finding value of company by comparison of market value of a share to its book value, study tends towards book to market ratio. For finding book value of a firm the study divide equity of a firm by its total number of outstanding shares. As for market price is concerned study tend towards the ongoing price of share in stock market.If a firm offer high return and having high book value than its market value, the firm is riskier and in future returns of stock will be lo wered than today. The following formula is used for calculating book to market value: B/M = Book Value per share Market value per share Lewellen (2001) states that as compare to P/E ratio B/M has higher predictive power for predicting stock return. But when study compare B/M ratio with dividend yield than dividend yield is good forecaster than B/M ratio. 4. 3 Dividend yield Following S.Kheradyar et al, (2011) second independent variable in this study is Dividend yield which is calculated as dividing dividend per share on market price per share. If market price is lower than dividend yield will be higher and give a riskier signal for investment. Contrast to higher dividend yield is low dividend yield; such happen when market price per share is higher than dividend yield and gives an optimistic view for investment.The following formula demonstrates how to calculate dividend yield: Dividend Yield (%) = (Dividend per Share / Market rate per share) x 100 4. Earning Yield The empirical li teratures lay foundations of the predictive power of earning yield on stock return, and find out the association between earning yield and stock return is considerable, because earning yield plays as a risk factor in relation with stock return. Moreover, the earning yield can demonstrate the efficiency of market that has an important role in emerging markets, thus this study uses earning yield as the empirical predictor of stock return. Following S. Kheradyar et al, (2011) we have measured earning yield as earning per share divided by price of share. 5.Regression Model In this research article we have investigated three financial ratios EY, DY and B/M to determine whether they predict stock returns. This research study has used the stock return and the above mentioned financial ratios association at 3 Research Journal of Finance and Accounting ISSN 2222-1697 (Paper) ISSN 2222-2847 (Online) Vol 3, No 10, 2012 www. iiste. org two samples as the foundation for the formulation of Eight hypotheses. On the grounds of their appropriate regression models the eight hypotheses are divided into two sets.In this study we have used the two models of simple nd multiple regressions to apply Predictive regression; it is an important tool for predicting stock returns. A set of panal data is used for the formulation of these two models. For tackling the problem of heteroskedasticity and non-normality distributed residuals, we applied generalized least squares method. Following S. Kheradyar et al, (2011) we have used panal models to formulate predictive regressions. Hence we have used simple regression model to test the first 6 hypothesis which are formulated on the basis of association between each financial ratio and future stock returns.The simple regression model has the following form: SR it = ß0 + ßi Xi (t-1) + eit Where, SR it= in time period t, the return of ith stock, ß0= the estimated constant, ßi= ith stock predictable coefficient, Xi (t-1) = in period t-1 financial ratios of the ith stock, eit = error term. Similarly following S. Kheradyar et al, (2011) we have used multiple regression model to test the other two hypotheses H7 and H8, these two hypotheses are formulated on the basis of relationship between combined financial ratios and future stock returns.The model has the following form: SR it = ß0 + ßi1 DYi (t-1) + ßi2 EYi (t-1) + ßi3 B/Mi (t-1) + eit Where, SR it= in time period t, the return of ith stock, ß0= the estimated constant, ßi1= for DY the Ith stock predictable coefficient, ßi2= for EY the Ith stock predictable coefficient, ßi3= for B/M the Ith stock predictable coefficient, DYi (t-1) = is ith stock DY factor in period of time t-1, EYi (t-1) = EY factor of ith stock in period of time t-1, B/Mi (t-1) = B/M factor of ith stock in t-1 time period, eit = error terms. 6.Results and Discussion For the first 6 hypothesis the predictive regression results are summarized in Table 1. The coefficient of di vidend yield in Table 1 demonstrates a positive relationship of dividend yield in period (t-1) and stock returns in period (t) in both samples that is when dividend yield increases by one unit it will cause an increase of 0. 021 and 0. 010 units in stock returns of two samples respectively. As for the p-value of coefficient of Dividend yield is concerned it is 0. 016 in sample one which is less than 0. 5, so the relationship is statistically significant and the null hypothesis H1 is rejected, however in sample two the association is insignificant so hypothesis H4 cannot be rejected.The coefficient of earning yield in Table 1 demonstrates a positive relationship of earning yield in period (t-1) and stock returns at period (t) that is when earning yield increases by one unit it will cause an increase of 0. 013 and 0. 008 units in stock returns in the two samples respectively. As for the p-value of coefficient of earning yield is concerned it is 0. 19 and 0. 010 in the two samples resp ectively which is less than 0. 05, so the relationship is statistically significant, therefore we will reject hypothesis H2 and H5. The negative coefficient of Book to market value in table 1 notifies an inverse relationship of B/M and stock returns in both samples that is if B/M ratio increasing the stock return will be decreasing and vice versa. The p-value of coefficient of B/M value 0. 000 indicates that the relationship is statistically significant in both samples, so hypothesis H3 and H6 have been rejected.S. Kheradyar et al, (2011) found that DY has negative influence on stock return, and a positive association between EY and stock return. He also found a positive impact of B/M on stock return in (2) (1) 4 Research Journal of Finance and Accounting ISSN 2222-1697 (Paper) ISSN 2222-2847 (Online) Vol 3, No 10, 2012 www. iiste. org sample 2 but a negative one in sample 1. It can also be noticed by looking at the adjusted R-square that B/M has the highest predictive power, and th is result is also supported by S. Kheradyar et al, (2011). Insert Table 1 Here) Now we will test to see whether stock return predictive power increases with the combination of EY, BM and DY. We will reject H7 and H8 because it can be seen in Table 2 that the predictive regressions are statistically significant. Thus we can say that stock return can be predicted by the combination of EY, BM and DY. Also we can say that as compare to the other two ratios, the variations of the ratio of book to market has greater impact on stock return, because in both samples it has the highest coefficient.Similarly by looking at the adjusted R-square we can say that in the two samples stock return predictive power increases when the combination of EY, BM and DY increases. (Insert Table 2 Here) 6. Conclusion Literature regarding predictability of stock returns has changed over the last 20 years. With evolution researchers and economists separated price to earnings ratio, dividend yield, inflation, and book to market ratio, beta, industry returns, interest rate, and size of firms from amongst other variables which were considered important for predicting return of stocks.Presently strong evidences are present regarding variables for predicting stock returns. Analysis showed that financial ratios have significant power of predictability for forecasting returns of stock and they predict future stock return of Pakistani market, and B/M has higher predictive power as compare to other ratios. Similarly the predictability of stock return is enhanced by the combination of financial ratios. References A. Schrimpf, (2010). International Stock Return Predictability under Model Uncertainty. Journal of International Money and Finance, 29: 1256-1282. S. Kheradyar, I. Ibrahim, and F.Mat Nor, (2011). Stock Return Predictability with Financial Ratios. International Journal of Trade, Economics and Fiance, 2(5): 391-396. J. Y. Campbell, and R. J. Shiller, (1988). Stock Prices, Earnings and Expecte d Dividends. Journal of Finance, 43(3): 661-676. Chan, L. Hamao, Y. Lakonishok, J. (1991). Fundamental and Stock Returns in Japan. The Journal of Finance, 17391764. Mukerji, S. Dhatt, M. Kim, Y. , (1997). A Fundamental Analysis of Korean Stock. Financial Analyst Journal, 53: 7580 Kothari, S. P. , Jay A. Shanken, (1997). Book-to-Market, Dividend Yield and Expected Market Returns: A TimeSeries Analysis.Journal of Financial Economics 44: 169-203. J. Pontiff, and L. Schall, (1998). Book-to-Market Ratios as Predictors of Market Returns. Journal of Financial Economics, 49: 141–160. Lewellen, J. , (2002). Predicting Returns with Financial Ratio. National Bureau of Economics Research, MIT working paper no. 4374-02 Ang, A. and Bekeart, G. , (2006). Stock Returns Predictability. The Review of Financial Study, 651-707. E. F. Fama and K. French, (1992). The Cross-Section of Expected Stock Returns. Journal of Finance, 47: 427-465 Lewellen, J. , (2001). Predicting Returns with Financial Ra tios. Journal of Financial Economic, 209-235.

the best years of our lives essays

the best years of our lives essays The Best Years of Our Lives aims to draw people ¡Ã‚ ¯s attention towards the efforts made by those World War II veterans to reintegrate themselves into the civilian society and the difficulties confronting them during that process. Thanks to William Wyler ¡Ã‚ ¯s subtlety and delicate touch, this film successfully defines the sensitive problems facing veterans: unemployment, ostracism, alcoholism. Furthermore, this film pulls no punches in telling an important story that many would have stayed away fromD the effects of war on the people. The very first difficulty is unemployment, best exemplified by Fred ¡Ã‚ ¯s experience. The post-war era sees a readjustment of orientation towards the civilian life. The enormous government spending is cut and job opportunities shrink. Without appropriate skills, veterans can not compete with other civilians in the struggle for the shrinking pie of job opportunity. They can not even get across the threshold of society, let alone integrate themselves into it. Through the loan program Al is in charge of, the film reflects the reality that the government is taking some measures to help veterans begin a new life, such as easing restrictions for college. But such efforts are far from enough. Fred ¡Ã‚ ¯s experience in the place full of old planes suggests that nobody but veterans can save themselves. In addition to unemployment, estrangement from their family members and misunderstanding of the civilian people leave them with an unequivocal sense of ostracism. The feeling of being m arginalized by the society exists throughout the whole movie, best represented in the beginning when three men unexpectedly gather at the Butcher ¡Ã‚ ¯s bar after they return home. The cruel reality shatters their dreams. Alcoholism turns out to be a by-product of disillusion and that sense of ostracism, even becoming a barrier between them and their family members. It is pretty daring for Wyler to treat alcoho ...

Organizational Metaphor Definition and Examples

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Taylor (1911) argued that an employee is very much like an automobile: if the driver adds gas and keeps up with the routine maintenance of the vehicle, the automobile should run forever. His  organizational metaphor for the most efficient and effective workforce was the well-oiled machine. In other words, as long as employees are paid fairly for their outputs (synonymous with putting gas into a vehicle), they will continue to work forever. Although both his view and metaphor (organization as machine) have been challenged, Frederick Taylor provided one of the first metaphors by which organizations operated. If an organizational employee knows that this is the metaphor that drives the organization, and that money and incentives are the true motivating factors, then this e mployee understands quite a bit about his organizational culture. 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John Wiley Sons, 2004)Lawyers representing these women [in the court case Wal-Mart v. Dukes] . . . claimed that Wal-Marts family model of management relegated women to a complementary yet subordinate role; by deploying a family metaphor within the company, Wal-Marts corporate culture naturalized the hierarchy between their (mostly) male managers and a (mostly) female workforce (Moreton, 2009).  (Nicholas Copeland and Christine Labuski, The World of Wal-Mart: Discounting the American Dream. Routledge, 2013)Framing Wal-Mart as a kind of David in a battle with Goliath is no accident al moveWal-Mart, of course, has worn the nickname of the retail giant in the national media for over a decade, and has even been tagged with the alliterative epithet the bully from Bentonville. Attempts to turn the tables of this metaphor challenge the person-based language that otherwise frames Wal-Mart as a behemoth bent on expansion at all costs. (Rebekah Peeples Massengill, Wal-Mart Wars: Moral Populism in the Twenty-First Century. New York University Press, 2013) Think of Wal-Mart as a giant steamroller moving across the global economy, pushing down the costs of everything in its pathincluding wages and benefitsas it squeezes the entire production system.   (Robert B. Reich, Supercapitalism: The Transformation of Business, Democracy, and Everyday Life. Knopf, 2007)After experiencing the flaws of having someone in Bentonville make decisions about human resources in Europe, Wal-Mart decided to move critical support functions closer to Latin America.The metaphor it used for describing this decision is that the organization is an organism. As the head of People for Latin American explains, in Latin America Wal-Mart was growing a new organism. If it was to function independently, the new organization needed its own vital organs. Wal-Mart defined three critical organsPeople, Finance, and Operationsand positioned them in a new Latin American regional unit. (Kaihan Krippendorff, The Way of Innovation: Master the Five Elements of Change to Reinvent Your Products, Services, and Organization. Platinum Press, 2003) The Big Tent Metaphor In what many observers will see as the de facto expression of mainstream U.S. Jewrys outlook on J Street, members of the Conference of Presidents of Major American Jewish Organizations voted 22-17 (with three abstentions) to reject the membership application of the self-labeled pro-Israel, pro-peace lobby. . .   J Street said in a statement, This is a sad day for us, but also for the American Jewish community and for a venerable institution that has chosen to bar the door to the communal tent to an organization that represents a substantial segment of Jewish opinion on Israel. Jewish leaders have used a big tent metaphor to describe which views on Israel and U.S. foreign policy are encompassed within the communitys consensus. Since its formation in 2008, J Street has been a frequent subject of debates on how far that tent stretches, and the groups bid to join the Conference of Presidents proved no different. Alina Dain Sharon and Sean Savage, J Street Rejected by Umbrella Group. (Heritage Florida Jewish News, May 9, 2014) Football as a Flawed Organizational Metaphor for Fire Fighting A metaphor seeps deeply into organizational narratives because the metaphor is a way of seeing. Once established it becomes a filter through which participants both old and new see their reality. Soon enough the metaphor becomes the reality. If you use the football metaphor you would think that the fire department ran a series of set plays; finite, divisible, independent actions.You could also assume that at the end of these short segments of violent action, everyone stopped, set up the next plan and then acted again. A metaphor fails when it does not accurately reflect core organizational processes. The football metaphor fails because fires are extinguished in one, essentially, contiguous action, not a series of set plays. There are no designated times for decision making in firefighting and certainly no timeouts, though my aging bones might wish that there were.(Charles Bailey, Metaphors Mask Realities of Firefighting. FireRescue1, Feb. 16, 2010)

Power of E-Commerce over Traditional Mall Shopping POWER OF E-COMMERCE OVER TRADITIONAL MALL SHOPPING

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MANAGEMENT IN THE 21ST CENTURY - Essay Example the organizations to achieve this goal there is need for the managers to break down bureaucratic structures to allow close interaction between workers and managers at various levels, recognize the potential of employees, capitalize organizational teams and organization of projects. Management can be viewed as a form of idea and a structure of values based on the perception that it can secure a limitless growth of expansion in the creation and exchange of human significance across the globe (Smith) Customers want their orders processed as fast as possible and with greater efficiency. This requires organizations to be fully prepared to respond to emergency requests of the customers while maintain continuous improvement of products and services they deliver to the customers. It is apparent that organizations must make a profit in order to survive in the market. The efficiency of management is achieved at four levels namely; natural, social, individual and ethical level (Alain, 2006). The management should have a limitless predisposition towards a systematic in addition to the occasional regulation of nature and boundless accumulation and capitalisation of knowledge for governing nature. Managers require skills to address issues at all levels from individual, social, organizational and global levels by establishing a clear link of how various things interact at all levels across the globe. The new management style involves focusing on short-term financial performance. Just as aforementioned, organizations must make a profit on a daily basis in order for them to survive. Investors use returns of their investments as a yardstick to measure the efficiency of management (Alain, 2006). This puts managers under intense pressure to put in place concrete measures to achieve short-term finance performance. There is an increasing urgency in production and consumption of products and services mainly as a result of increasing use of information technology. These aspects have

Final Essay Example | Topics and Well Written Essays - 1500 words - 5

Final - Essay Example He was also among the first philosophers to believe that kings did not have any rights over commoners. Hobbes had a strong conviction that no man has a natural right to dominate another man (Hobbes, 2013:21). He was also among the first people to express – in writing – that he trusted that all men were created equal. This seems to have been the genesis of the two ideologies of liberalism and conservatism. Hobbes represented the latter (Lieberman, 2013:54). At face value, Hobbes’ views appear to lean towards liberalism, but a closer look reveals a deeply entrenched conservative mindset that does not waver in the face of the strongest winds of liberalism. The fact that Hobbes often features – constantly – on the conservative side in liberalism versus conservatism debates shows that he was a conservative thinker (Mannheim, 2013:14). He is the epitome, the embodiment, the perfect example of what a conservative should be. Hobbes, while employed as an instructor to a young King Charles II, exerted so much influence on England’s throne that the king had to agree to be the first monarch to divide his ordained power over Britons with the British Parliament. In spite of this, there was a malicious angle to Hobbes’ views (Gert, 2013:34). For example, his theory of human n ature was that the inherent state of man was to be in conflict. In fact, Hobbes held this view so strongly that he termed the theory of peaceful times as nothing more than the absence conflict. In other words, his opinion was that the perpetual clashes between men, households and governments was as inherent and natural as sunset (Gert, 2013:14). Hobbes’ opinion was that mankind, by his true nature, is evil, conceited and ready kill another man because that is what mankind does. This notion resulted in what ultimately became the foundation of today’s contemporary conservative philosophy (Bunce, 2013:16). With this in mind, how can