Financial Ratios and Stock Return: Evidence on selected Plantation Companies in Malaysia

Topics: Financial ratio, Stock market, Financial ratios Pages: 20 (4307 words) Published: October 6, 2013

SEMESTER 2 2012/2013
Financial Ratios and Stock Return: Evidence on selected Plantation Companies in Malaysia



Financial Ratio and Stock Return: Evidence on selected Plantation Companies in Malaysia Abstract
This paper is to investigate the predictive ability of several financial ratios for stock return in Malaysia specifically in plantation industry. 23 listed plantation companies were analysed for the period from 2008 to 2012. Four of the common financial ratios were take into consideration in this study. These financial ratios include dividend yield (DY), book to market ratio (B/M), earning per share (EPS), and firm size. Pool ordinary least squares regression (OLS) method is adopted to estimate the predictive regression. The descriptive statistics indicate that there is a negative relationship between the dependent variable and the two independent variables include B/M and EPS. In contrast, the firm size and DY is positive correlated with the stock return. In addition, the empirical results indicate that dividend yield is the best predictor on stock return in the context of Malaysia’s plantation sector.

Section 1 Introduction
Research on predicting stock returns using various variables such as inflation, accuracy of disclosure of public information, discount rates are widely discussed in past studies. Return is something that investor expects to receive on their original investment in the future. Alternatively, financial ratios have provided investors another method in predicting the stock return. Previously, financial ratios are used to evaluate performance of a company. So far, numerous studies on stock return and financial ratios have conducted based on different sectors over the countries. However, the research on plantation sector is limited. Therefore, our main focus of this research is to determine the connection between financial ratio and stock return in the Malaysia stock market especially in the plantation industry. The reason plantation sector is chosen as our focus in this research is due to the growing of global demand in plantation. Presently, plantation is one of the major contributors in the economy of Malaysia amongst the sectors. In Malaysia, oil palm industry is currently the second largest export revenue earner for Malaysia after the electrical and electronics (E&E) sector. Meanwhile, Malaysia is also known as the world’s top exporter of palm oil which exported to several countries such as China, India, the European Union (EU) and Pakistan. Essentially, plantation sector is expected to rise in the future. In this study, we examine how the stock return can be predicted by using the financial ratio. 23 of plantation listing firms in Bursa Malaysia are selected as our research data. Meanwhile, the period we take into consideration is over the period from 2008 to 2012. The purpose of this research is to determine the predictability of financial ratio to the stock returns specifically in the plantation sector. By this research, we intend to provide an analysis of forecasting stock return using financial ratio. Financial ratios that commonly used to forecast the stock return are the dividend yield (DY), book to market ratio (B/M), and firm size. However, we extend the study by adding another financial ratio in predicting the stock return which is the earning per share. The empirical findings of this study indicate that financial ratios do have the predicting power on stock return in Malaysia’s plantation industry. Meanwhile, the results also show that firm size has the strongest forecasting power amongst the four variables. Therefore, we can conclude that...

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