Analysis of the effects of the company's financial ratios on stock returns

Creating successful and effective investment strategies in the stock market depends on knowing the company-specific factors that affect stock returns. Stock returns, which are likely to move independently of company financials in the short run due to market-specific factors, are expected to move in parallel with company financials in the long run. Having information about the direction and level of the impact of the company's profitability, operating efficiency, liquidity and financial structure on the stock returns, which constitutes the framework of the fundamental analysis, enables the creation of investment strategies that provide the highest rate of return at the agreed risk level. For this purpose, many studies have been conducted in the finance literature that analyze the relationship between the company's financial ratios and stock returns. Inconsistent results have been obtained in these studies conducted for both the stock market of our country and the stock markets of foreign countries. From this point of view, it has been evaluated that more and more detailed studies on the subject are required in order to accurately reveal the effect of the company's financial ratios on stock returns. Our study is one of the steps taken in order to fulfill this requirement. In our study, the relations between the financial ratios and stock returns of 68 companies whose stocks are continuously traded in Borsa Istanbul and whose actual free-float value is 30 million TL and above were analyzed by using quarterly data for the period of 2012-2019, based on dynamic panel data model, panel vector autoregressive model and panel cointegration model. As a result of the analysis, in the estimation of stock returns, it has been concluded that return on equity, return on assets, P/E ratio, P/B ratio, operating cash flow ratio and Tobin q ratio can be used as positive leading indicators, while financial leverage ratio and cash ratio can be used as negative leading indicators.