Stock return predictability with financial ratios : an empirical study of listed manufacturing companies in Sri Lanka

Abstract

This study attempts to investigate financial ratios’ predictive power, using the time series data over the period of 2011/2012 – 2016/2017 for 33 listed manufacturing companies in Colombo Stock Exchange. This empirical study specifically identifies financial ratios, which are known as the predictors of stock returns in the share market, to test the stock return predictability on the Sri Lankan market. The financial ratios include the ratio of dividend yield, earnings per share, earnings yield, return on equity and current liability to total asset ratio which are most useful and effective on stock return predictability in order to cover a wide range of predictions which have been used by all most all the previous researches. The results of OLS regression indicate that there exists significant impact of financial ratios on stock return. Furthermore, based on the fixed effect it is confirmed that the stock return has positive relationship with earning yield, Earning per share and Firm age. The regression results show high predictability power, since the R2-values are high and the coefficients are very significant using heteroscedasticity and autocorrelation corrected standard errors. The results show the all ratios hold a someway predictive power regarding stock returns of the Listed Manufacturing Companies in Colombo Stock Exchange.