Financial Ratios as Empirical Predictors of Stock Return

The main objective of this paper is to investigate the role of financial ratios as empirical predictors of stock return in separate and combine sets for the period January 2000 to December 2009 in Bursa Malaysia. Lewellen's financial ratios include dividend yield (DY), earning yield (EY) and book-to-market ratio (B/M) are considered as empirical predictors of stock return. This study applies the panel data model and generalized least squares (GLS) techniques to estimate the predictive regressions in separated and combined models. The obtained results reveal that the financial ratios are able to empirically 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. Therefore, the financial ratios as empirical predictors seem to play unique and complementary roles on stock return predictability.