Forecasting Stock Returns by Financial Ratios in Pakistani Stock Market
Abstract
This paper investigates the use of firm’s financial information in forecasting the stock returns in
Pakistan during 2006 to 2017. For this purpose, the study selects 100 companies from all thirty-five sectors of
Pakistan stock exchange. The power of financial ratios from different categories such as solvency (total debt/
total equity), profitability (net profit margin, returns on equity, earnings/share) and valuation (price-earnings
ratio, price-book ratio) are tested for predictability of stock returns. The study applies a generalized method of
moment (GMM) techniques to forecast the stock returns in Pakistan by using of financial information of
company. The empirical result suggests a significantly negative impact of total debt/equity ratio on stock
returns. In contrast, a significantly positive impact of net profit margin, price-book ratio and returns on equity
has been noted for stock returns. The practical implications of this study covers investors, policy makers,
governments, stock market regulators stock market analysts, and multinational corporations that can make
decisions on their different field based on Pakistani context.
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