An Empirical Study of Financial Ratios Affecting Stock Returns in the Indian Stock Market

Abstract

Stock market returns are the profit/loss the investors generate out of their investment in the stock market. These returns are dependent on various micro-economic and macro-economic factors. The present study analyses the micro-economic factors (financial ratios) that affects stock return which will provide a parameter for investors to decide about their investment. For the purpose of empirical study 12 firms of Fast Moving Consumer Goods (FMCG) sector and 6 firms of pharmaceutical sector which are trading on the NSE (National Stock Exchange) is selected and is studied for the period 2010-2017. The effect of financial ratios namely, DPS (Dividend Per Share), EPS (Earning Per Share), CR (Current Ratio), QR (Quick Ratio), ROE (Return on Equity), ROA (Return on Asset), DER (Debt to Equity Ratio), PBV (Price to Book Value), DPR (Dividend Pay-out Ratio), DYR (Dividend Yield Ratio) on stock returns is analysed using panel data analysis. This study uses Panel Vector Auto Regression Model (PVAR). In order to specify the appropriate estimation method of our PVAR Models, we employed Hausman test. Accordingly, our PVAR Models are estimated with fixed effects. The study found out that the price-book value, dividend per share has a significant impact on stock returns. The results of Wald test showed that there is a short run relationship between PBV, EPS, DPS, ROA and SR.