Predictability of stock returns using financial ratios in the companieslisted in Tehran Stock Exchange

ABSTRACT: As one of the complicated and interesting phenomena for both investors and analysts, stock return has always been a source of controversy in the financial markets. The assessment of correlation between financial ratios and their impacts on the stock return predictability is one of the issues often addressed in this area. The present study aiming to assess correlation between financial ratios and their impact on predicting stock returns for the companies listed in the Tehran Stock Exchange covers four financial ratios including price to earnings, book to market value, dividend yield, and capital gain. In order to test the research hypotheses, the historical data over a ten year period during1998-2007 for the sample under study were extracted from the respective data bases. The results of data analysisusing E-views Software as well as simple and multiple linear regression tests suggested that of the ratios under in question; book to market value and capital gain significantly affect stock return predictability and that stock return can be predicted by analyzing these variables.