—This paper studies whether financial ratios can
predict stock returns for the period from January 2000 to
December 2009 in Malaysia stock exchange. We select three
financial ratios include dividend yield (DY), earning yield (EY)
and book-to-market ratio (B/M) that have been documented to
predict stock returns. This study applies generalized least
squares (GLS) techniques to estimate the predictive regressions
in form of simple and multiple models of panel data sets. The
obtained results reveal that the financial ratios can predict
stock return, as the B/M has the higher predictive power than
DY and EY respectively. Furthermore, the financial ratios are
able to enhance stock return predictability when the ratios are
combined in the multiple predictive regression model.
—Financial ratios, Stock return predictability,
Predictive regression, Malaysia stock exchange.
The authors thank anonymous referees, conference participants at the
2011 International Conference on Sociality and Economics Development
(ICSEP) in Kuala Lumpur, Malaysia for constructive comments.
S. Kheradyar is with the Graduate School of Business, National
University of Malaysia-UKM (e-mail: ZP00504@mail2.ukm.my).
I. Ibrahim is with the Graduate School of Business, National University of
Malaysia-UKM (e-mail: email@example.com).
F. Mat Nor is with the Graduate School of Business, National University
of Malaysia-UKM (e-mail: firstname.lastname@example.org).
Cite:S. Kheradyar, I. Ibrahim, and F. Mat Nor, "Stock Return Predictability with Financial Ratios," International Journal of Trade, Economics and Finance vol.2, no.5, pp. 391-396, 2011.