"What determines stock returns?" Although the answer to this question has been much sought by researchers and investors, most studies to date are empirical in nature and provide a very limited view of the problem. The general findings are that certain firm characteristics do have an affect stocks returns. Among these characteristics, the popular ones studied include market-to-book value ratio, size, and price-earning ratio. However, many studies have found these characteristics to have a negative relationship with stock returns. Nonetheless, some researchers show that market-to-book value has stronger explanatory power than others in specific markets. All in all, there is no consensus on which single or combination of characteristic(s) best explain stock returns universally, leaving interested academics and investors to find out which research settings are best proxies for their situations and which characteristics should be taken into consideration.
[...] and Titman, S “Evidence on the Characteristics of Cross Sectional Variation in Stock Returns.” Journal of Finance, vol pp.1-33. Davis, J. L Cross-Section of Realized Stock Returns.” Journal of Finance, vol.49, no.5 (December):1579-93. De Bondt, W. F. M. and R. H. Thaler “Further Evidence on Investor Overreacion and Stock market Seasonality” Journal of Finance (1987) Dreman, D. 1980a. Contrarian Investment Strategy (New York: Random House, 1980) Dreman, D. 1980b. Regression Be your Guide.” Forb (November 24, 1980), pp.210-211. Dreman, D Market Beating System That's Batting Money (December 1979), pp. [...]
[...] during 1979- Debt to Equity Ratio Bhandari (1988) shows that there is a positive relationship between debt-to-equity ratio and stock return, but once the former is controlled, stock returns should be explained better by ROE, size or Market-toBook ratio Conclusion In studying firm characteristics that have explanatory power for stock returns, one should consider all the variables that have been found to be significant by researchers. The degree of explanatory power varies depending on the universe of stocks, period of study, threshold values of each criterion and so on. [...]
[...] Raines Sales-Price and Debt-Equity Explain Stock Returns Better Than Book-Market and Firm Financial Analysts Journal, vol.52, no.2 (March/April):56-60 Ballon, R. J., Tomita, I Financial Behavior of Japanese Corporations.” Tokyo: Dokansha International Basu, S Investment Performance of Common Stocks in Relation to Their Price-Earnings Ratios: A Test of the Efficient market Hypothesis.” Journal of Finance, vol.32 no.3 (July):663-682. Basu, S Relationship Between Earnings Yield, Market value and Returns for NYSE Common Stocks: Further Evidence” Journal of Financial Economics (June):129-156. Bhandari, L.C. [...]
[...] Thus, to be able to apply academic research to real world more efficiently, one should probe further to understand how different settings might influence the relationship between firm characteristics and stock return. In academic research, stock returns have been found to be associated with various firm characteristics, including size (or Market Capitalization or Market value of Equity); Market-to-Book Ratio; Price-to-Sales and P/E ratio. However, most studies to date do not explore all these variables at once. Size and Market-to-Book have been found to be important measures in explaining cross sectional stock returns (e.g. [...]
[...] Evidence on Size and Price-to-Book Effects in Stock Returns” Financial Analyst Journal Nov/Dec 1997; page 34-42. Goff, N “Low-Priced Stocks: More Bank for the Buck”. Financial World, (October 15) pp.48-50. Harris, R.S., Marston F.C “Value versus Growth Stocks :Book-to-Market, Growth, and Beta.” Financial Analysts Journal., vol no (Sept/Oct1994): page 18-24. Haugen, R., The New Finance: The Case against Efficient Market (Prentice Hall, Englewood Cliffs, 995) Heston, S., Rouwenhorst, G. and Wessels, R Rold of Beta and Size in The Cross-Section of European Stock Returns.” European Financial Management 4-28. [...]
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