Literature Review On Earnings Of Low Btm Stocks
Sekaran (2000) defined that literature review is the corroboration of a comprehensive review of the published and unpublished work from secondary sources of data in an area of specific importance to the researcher. Therefore, this part reviews the related literature about the research problem as a foundation for developing a theoretical framework to be tested in this research.
For a number of years, there was a sizeable research by accountants and finance people trying to find stocks with a low BTM ratio earned lower returns than Stocks with a high BTM ratio. Moreover, Daniel et al (2001) find that BTM ratio has a weaker power to predict average Stock returns in the U.S. market than the Japanese stock market. They investigated the U.S. and Japanese stock markets from 1975 to 1997. Furthermore, Stattman (1980) finds there is positive relationship between book-to-market ratio and average return for U.S. stocks. Nevertheless, Chen et al (2007) find a positive relation between book-to-market ratio and average return for the Chinese stock market. Wang and Iorio (2007) show that BTM ratio has the sufficient power to explain stock returns, and that the conditional local betas and the global betas are not related to stock returns for the period 1994 through 2002 in Chinese's stock market. Lams (2002) there is relationship between book to market ratio and stock return is positive for Hong Kong Stock Exchange for the period July 1984–June 1997.
According to Rosenberg et al. (1985)find that average returns in the U.S. markets are positively related to the ratio of a firm’s book value of common stock to its market value, BE/ME. Chan et al. (1991) also find a similar positive BE/ME and average return relation in the Japan stock market. Chui and Wei (1998) examine the relationship between expected stock returns and book-to-market equity, and size in five Pacific Basin emerging markets. They find that the relationship between average stock return and is weak at all five markets. However, the book-to-market equity can explain the cross-sectional variation of expected returns in Hong Kong, Korea, and Malaysia, while the size effect is significant in all five markets except Taiwan.
Moreover, lam (2002) find the beta was not able to appear to explain the stocks return in the Nikkei Stock Exchange of Hong Kong in the period from 1984 to 1997. It seems that the three variables including the size, B / M and P/E ratio can be interpreted in cross-sectional changes in the Nikkei stock return during that period. Furthmore, Basu (1983), found that the impact of P/E ratio was not visible with respect to small capital stocks. In another research, Lewllen (2004) found that there was a weak relationship among the Stock Return and E/P for the period 1946 through 2002 in the companies listed in New York Stock Exchange.
As well as, Isa and Jin (2000), a weak relation among earning– per-price ratio and return stock for the Malaysian stock market, also there is significant size can have an impact on Malaysian stock returns. Sezgin (2010) find there is relationship among variables long-run and short-run RE effects negatively on PE in long-run and DY ratio effects positively on PE in long-run, over the period 2000-2009 of ISE 100 index.
Ong et al (2010) This study observes the development of the Malaysian stock market index, the Kuala Lumpur Composite Index (KLCI) and its PE ratio between 1994 and 2010, a time period that involves notable financial crisis such as the 1997/98 Asian financial crisis and the global financial crisis of late. Although the notions that high levels of PE Ratio could have resulted in the fall of stock market returns in the Malaysia context is rejected in this study, the results show that PE ratio is still a useful predictor of the performance of KLCI. Moreover, Al-Mwalla et al (2010), Find there is long run equilibrium between dividend yield, P/E ratio, size and the return on the stocks of Jordanian companies. The sample of 24 companies listed in the Amman Bursa was selected. The annual average values for the suggested variables from 1980 to 2006 were calculated.
In addition, Yao et al (2010) find a pervasive negative relation between asset growth and subsequent stock returns on the nine equity markets in Asia for the period from 1981 to 2007. In addition, Tudor (2008) finds there is no relationship between the return on assets with stock return, on the Romanian stock market for the period 2002 to 2008. Moreover, Mais (2005) performed research on the effect of financial ratios, including NPM, ROA, ROE, DER, and EPS, on stock price of companies listed on Jakarta Islamic Index in 2004. The outcome of this research explains that statistically all variables except DER are significant and have the positive impact on stock price.
Roswati (2007) studied the effect of CR, TATO, DER, ROE, EPS, and PBV on stock price of manufacturing industry with five sub-industries, including retail, food and beverages, tobacco, automotive, and pharmacy. The result shows that the significant financial ratios in retail industry are ROE, EPS, and PBV; In food and beverages industry are EPS and PBV; In tobacco industry are CR, TATO, DER, EPS, and PBV; In automotive industry are DER, ROE, EPS, and PBV while in pharmacy industry are CR, EPS, and PBV. In overall five industries, the influential financial ratios are TATO, DER.
Bodie (1976) finds claims that there are two distinct ways to define stocks as a hedge against inflation. First, a stock is a hedge against inflation if it eliminates or at least reduces the possibility that the real rate of return on the security will fall below some specific floor value. Secondly, it is a hedge if and only if its real return is independent of the rate of inflation.
Canova et al ( 1995) ,they find, analyze the Stock return, long term term structure, inflation and Real activity for US, Germany, Japan and UK and concluded that there was relationship with nominal stock returns are negatively significant to inflation only in the US, and it didn't have correlated for other countries. Moreover, Cozier and Rahman (1988) Investigated in stock returns, inflation and real activity in Canada. First, using the rational expectation's forecasting procedure, they degrade the Canadian series to the components of inflation, expected and unexpected. They said that there is a negative relationship among stock returns and inflation. Therefore, Beirne et al (2009) they are examining the market, Interest rate and Exchange rate risk effect on the financial Stock returns. To examine this fact they selected three sectors (Banking, Financial Services and Insurance) of 16 different countries including some European countries. They used fourvariate GARCH-M Model. Their variables were short-term debt (90 Day treasury Bills Rate) and 10- years Government bond yield for all the countries. Overall results showed that interest rate and exchange rate effects common in banking sector and financial services but in the insurance sector interest rates and exchange rate have limited effect.
In addition, Boudhouch and Richarson (1993), they find data sets use, covering the period 1802 to 1990 of the United States from 1820 to 1988 and from Britain. Results obtained indicate a positive relationship between inflation and nominal stock returns on the long horizons.
Fama (1981), Suggests that there is a negative relationship between stock returns and the level of inflation. There is a negative relationship due to the existence of the relationship between inflation and output in the future. Expected economic downturn, in particular, since stock prices reflect corporate profits in the future, high inflation rates and lower stock prices. Moreover, Spyrou (2001) suggests that there is a negative relationship between stock market returns and inflation in Greece for the period 1990 to 1995.
Harvey (1993), Find the stock returns in emerging countries that can be very unpredictable and has to do with lower stock returns in developed countries. The emerging markets are less efficient than developed markets, and can get higher yield and therefore, low risk arising from the market by listing shares in the portfolios of investors. Therefore, Zhou (1996), the relationship between interest rates and stock prices using regression analysis, he finds that interest rates have a significant impact on stock returns, especially on the prospects for a long time, but was rejected the hypothesis that expected stock returns move one-for-one with ex Ante interest rates. In addition, you receive the results of long-term interest rates may explain a large part of the difference in the ratio of price to earnings, and is proposed to be associate with high volatility in the stock market to the high volatility in bond yields long-term and may be reached by changing the expectations of discount rates.
Asprem (1989), finds a positive relationship between stock returns and real activity using data from 10 European countries, as well as to find support for the money supply and interest rate and exchange rate variables. Nevertheless, Carrieri and Majerbi (2006) they find the pricing of exchange risk in emerging stock markets. It covers eight countries (Argentina, Brazil, Chile, Mexico, Greece, India, Korea, Thailand and Zimbabwe), and the collection of revenue on a monthly basis. Finally, the agent and the price of interest rate risk-free, and the common exchange risk factor important and significant marginal to the Governor of scale. Alam and Uddin (2009) they find the relationship among Interest rate and stock returns of developed and developing countries. To examine this, they collect the monthly interest rate and Stock Exchange Index from January 1998 to March 2003 of fifteen countries and run the panel regression. Finally, they said that there is the relationship among interest rate and stock returns is negative.
Beirne et al (2009) examined the market, Interest rate and Exchange rate risk effect on the financial Stock returns. To examine this fact they selected three sectors (Banking, Financial Services and Insurance) of 16 different countries including some European countries. They use fourvariate GARCH-M Model. Their variables were short-term debt (90 Day treasury Bills Rate) and 10- years Government bond yield for all the countries. Overall results showed that interest rate and exchange rate effects common in banking sector and financial services but in the insurance sector interest rates and exchange rate have limited effect.
Data Collection Method
This study was conducted with an extended review of secondary data relating to academic journals and relevant financial statements of the companies.
The responses of each company are obtained from the data stream of Universiti Utara Malaysia library, the sample is selected from Tokyo stock exchange in the period from January 2000 December 2010 (10years), and the sample consists of 3797 companies. Tokyo Stock Exchange, Inc. (TSE) fulfills a vital function as the country's central market, supporting the acquisition and management of capital both domestically and abroad. In order to enhance the autonomy of its self-regulatory function, the TSE chose to delegate all of its self-regulatory activities to a more independently managed corporation. In addition, the data collected were secondary data using a quantitative approach. Quantitative approach is the systematic scientific investigation of quantitative properties and phenomena and their relationships. The objective of quantitative research is to develop and employ mathematical models, theories and/or hypotheses pertaining to be natural phenomena. The regression and correlation results could be obtained through the EVIEWS in order to test the hypothesis between dependent and independent variables.
Model Specification and Multiple Regressions
Method uses multiple regressions to examine the relationship between stock returns, book-to-market ratio, price-to-earnings ratio, ROA, current ratio, change in inflation, change in interest rate and change in exchange rate.
The result of regression analysis is an equation that represents the best prediction of a dependent variable from several independent variables. This method is used when the independent variables are correlated with one another and with the dependent variable.
SR = α + β1BTM + β2P/E+ β3 ROA+β4 CR+ β5 ΔIN+β6 ΔIR+β7 ΔEXR
SR = Stock Return
BTM = book-to-market ratio
P/E = price-to-earnings ratio
ROA= Return on asset.
CR= Current Asset.
ΔIN = change in inflation.
ΔIR = change in interest rate.
ΔEXR = change in exchange rate.
This study examine the relation between the whole set of predictors and the dependent variable. In this model, all independent variables enter the regression equation at once. The aim of this analysis is to determine which of the independent variables are more highly significant to determine the stock return.
Results and Discussion
The results of multiple regression model show that the R-square is 32% which indicates that the
multiple regression model has very strong power of test with 54.2% of standard error.
Dependent Variable: SR
Method: Panel EGLS (Cross-section weights)
Date: 01/14/11 Time: 00:08
Sample (adjusted): 2001 2010
Periods included: 10
Cross-sections included: 3111
Total panel (unbalanced) observations: 21981
Iterate coefficients after one-step weighting matrix
White cross-section standard errors & covariance (d.f. corrected)
Convergence achieved after 12 total coef iterations
Mean dependent var
S.D. dependent var
S.E. of regression
Sum squared resid
Notes: B/M is book value / market value. P/E is price /earnings per share. Current ratios are current assets /current liabilities. ROA is Net income / total asset.ROE is net income/total equity. ***, **,* denote significance levels at 1%, 5% and 10% respectively. Depend on the three panels mentioned above we can see that the best panel, which can be used is Panel EGLS with AR (1) with the number of observations are 21981.
According to the results in the table above, it can be observed that there is seven independent variable that is significant. The first determinant is a book value to a market value ratio (B/M). According to the panel, the coefficient of (B/M) (0.022966) is significant at 1% confidence level and positively correlated with stock return. It means that the increase of the B/M level in the company would increase the company’s price level by only 2.2 percentage points. in addition, this result in line with the study of Stattman (1980).
In this study, I find that P/E for Tokyo listed companies is strong negative significantly impact the level of stock return used. Moreover, the coefficient of (P/E) (-2.93E-06) is significant at 1% confidence level. Nevertheless, P/E reflects the capital structure of the company in question. P/E is a financial ratio used for valuation: a higher P/E ratio means that investors are paying more for each unit of net income, so the stock is more expensive compared to one with the lower P/E ratio. As well as, this result in line with the study of Sezgin (2010).
Another factor that might affect company’s stock return is ROA. Moreover, Return on assets on assets is an indicator of how profitable a company is before leverage, and is compared with companies in the same industry. Since the figure for total assets of the company depends on the carrying value of the assets, some caution is required for companies whose carrying value may not correspond to the actual market value. In this study, I find that the coefficient of ROA is positive significantly impact the stock return. This result is similar with previous study by Kennedy (2005) where this ROA is positive significantly affect the stock return.
In addition, I find the ROE for Japanese stock exchange is week positive significantly impact the level of stock return used, however, the coefficient of ROE (0.000128) is significant at 10% confidence level. As well as, this result in line with the study of ………
According to the panel, the coefficient of (change in an interest rate) (0.180451) is significant at 1% confidence level and positively significantly with stock return. It means that the increase of the interest rate level in Japan's country would increase the company’s price level by only 17.4 percentage points. As well as and this result in line with the study of Solnik (1987).
According to the economic theory, I find that inflation for Japan economic is strong positive significantly impact the stock return. Moreover, the coefficient of (inflation) (0.180451) is significant at 1% confidence level. However, Inflation erodes your purchasing power and retirees on fixed incomes suffer when their nest egg buys less each passing year. This is why financial advisers caution even retirees to keep some percentage of their assets in the stock market as a hedge against inflation. as well as this result in line with the study of Boudhouch and Richarson (1993).
Final factor that might affect company’s stock return is the change in an exchange rate. Moreover, According to the panel, the coefficient of (change in the exchange rate) (0.715385) is significant at 1% confidence level and positively correlated with stock return. It means that the increase of the change in exchange rate level in the Japan economic would increase the company’s price level by only .67 percentage points. as well and this result in line with the study of Asprem (1989).
The objective of this study is to examine the relationship between selected B/M,P/E.CR,ROA,ROE, change interest rate, inflation, change exchange rate with stock return on Japanese firms, and to determine whether these independent variables are effective in predicting the stock return. Moreover, the sample used in this study is derived from listed companies on Tokyo stock exchange, over the period of 2000-2010 of which data is available.
In addition, In the case of Japan, it is important to recognize that the purpose of investment is to realize a positive return over a given time period. Identifying variables that successfully predict the returns for a given security is a continuing quest for investors seeking higher returns. Empirical analysis shows the importance of the influences that affect the stock return such as B/M P/E ratios, CR, ROA, ROE, Inflation, change in interest rate and change in the exchange rate. The findings of this current study using the regression analysis display that there is a strong positive significant relationship among B/M ratio and stock return. This result is consistent with a study conducted by Stattman (1980), Lams (2002), and Chen et al. (2007).
In addition, I found that P/E for Tokyo listed companies is strong negative significantly impact the level of stock return used, which that means if the PE ratio increase, the stock return will decrease. This finding is consistent with a study conducted by Sezgin (2010), Bagella et al. (2000). Moreover, I found the coefficient of ROA and ROE are positive significantly impact the stock return. This result is consistent with a study behaved by Kennedy (2005).
Furthermore, I found there is positively significantly between inflation, change in the exchange rate and change in an interest rate with stock return. This consequence is consistent with a study behaved by Boudhouch and Richarson (1993), Solnik (1987) and Asprem (1989.
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