A Study On Accounting Ratios And Stock Returns With Reference To National Stock Exchange Of India

Abstract

Accounting ratios and published financial information are important tools for investors, creditors and other interested parties to determine the profitability and control. A good financial condition of the company, have a significant impact on the performance of the stocks and on the performance of the stocks exchanges. The aim research paper is to study whether key accounting information will affect the prices of National Stock Exchange. The study used fifteen year accounting ratios from 2005–2020 such as ROE (Return on Equity), ROA (Return on Assets), P/E (Price to Earnings ratio), P/B (Price to Book Value ratio), P/S (Price to Sale Revenue ratio), P/C (Price to Cash flow ratio) listed in National Stock Exchange of India as explanatory variables (independent) to estimate stock returns. Secondary data is collected from the financial statements of the companies for the regular years from CMIE Prowess database and from websites of stock exchanges. The purpose of this study is to evaluate and illustrate the validity of these accounting ratios to confirm the profitability of the stock returns of listed companies. The study used Pooled OLS Model, Fixed Effect Model and Random Effects Model to assess the stock returns of the panel data from 160 companies. But the random effects model proved to be best fit according to Breusch and Pagan Lagrangian Multiplier test and Hausman test. The results of this research are significant in formulating investment strategies and predicting market efficiency for investors. The importance of this research is to provide strong evidence of the relationship between equity returns and accounting information, and to provide a fundamental basis for decision-making for investors and financial managers.