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Title: On the Usefulness of Accounting Ratios in Explaining Security Returns

Authors: Gun-Ho Joh

Addresses: Author address listing can be found in the "About the Authors" section at the end of the article.

Abstract: Many financial analysts argue that a firm's profitability is related to its stock price. Examining a sample from 1993 Annual Industrial Compustat and monthly CRSP, we find that return on total assets shows the highest correlation with stock prices among various profitability ratios. After controlling for industry classification, the average adjusted R² of the price-profitability regressions improves significantly. Including another profitability ratio in addition to return on total assets does not significantly increase the explanatory power of the relationship between abnormal returns and profitability ratios. The adjusted R² of the regressions are in general marginally significant and this study weakly supports the analysts' belief

Keywords: Profitability; stock prices; profitability ratios; accounting ratios; security returns.

DOI: 10.1504/JBM.1995.141002

Journal of Business and Management, 1995 Vol.2 No.2, pp.8 - 34

Published online: 05 Sep 2024 *