Abstract
The investment in stock market and other stocks issued by the firms require sufficient knowledge and understanding of the financial reports and information of the business firms. This study aims to investigate the effects of three types of financial ratios, i.e., profitability/liquidity, continuity and efficiency of business firms over the investors’ abnormal stock returns. To achieve the aim of the study, the ratios were categorized into two groups namely fundamental ratios and risk-proxy ratios. The financial ratios make a relationship between various economic variables of a firm and make it possible to compare financial information of various firms. The financial ratios also make it easier to evaluate the firm’s performance through examining the relationship between the variables of the financial statements. The results of this study showed that there is a significant relationship between the most fundamental accounting variables, i.e., return on assets, operational cash flow, changes in return on assets, changes in net profit margin and total asset turnover. The existence of this relationship shows the high dependence of abnormal stock returns on its intrinsic fundamental variables. However, there was not any relationship the liquidity ratio and stock returns. Moreover, there was not any significant relationship between the majority of risk proxy variables i.e., the ratio of accruals, operating leverage and stock issuance indicating the independence of abnormal stock returns from risk proxy variables.
Highlights
The investment in stock market and other stocks issued by the firms requires sufficient knowledge and understanding of the financial reports and information of the business firms
The variables based on fundamental valuation approach such as the ratio of assets return and operating cash flow of the firm and the variables based on risk proxy valuation approach such as operational leverage, accruals and stock issuance in a particular fiscal year determined by a firm will be examined
As it can be seen, there is a significant relationship between the five independent variables of ratio of return on assets, ratio of Cash Flow Operations (CFO) to total assets, changes in return on assets, changes in gross profit margin and changes in total assets turnover and the dependent variable of abnormal stock return
Summary
The investment in stock market and other stocks issued by the firms requires sufficient knowledge and understanding of the financial reports and information of the business firms. The investors, whether personal stockholders or the firms, are in need of a model to assess the performance of the companies and determine their expected stock returns. The risk-proxy valuation approach was introduced for the first time by Fama and French (1996) They concluded that the size and ratio of book value to market value as two risk indicators are significantly related to future stock returns. The variables based on fundamental valuation approach such as the ratio of assets return and operating cash flow of the firm and the variables based on risk proxy valuation approach such as operational leverage, accruals and stock issuance in a particular fiscal year determined by a firm will be examined.
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