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http://dx.doi.org/10.7232/iems.2013.12.4.406

Stock Price Predictability of Financial Ratios and Macroeconomic Variables: A Regulatory Perspective  

Kwag, Seung Woog (Division of Business Administration, College of Economics and Business Administration, Sookmyung Women's University)
Kim, Yong Seog (Department of Management Information System, Jon M. Huntsman School of Business, Utah State University)
Publication Information
Industrial Engineering and Management Systems / v.12, no.4, 2013 , pp. 406-415 More about this Journal
Abstract
The present study examines a set of financial ratios in predicting the up or down movements of stock prices in the context of a securities law, the Sarbanes-Oxley Act of 2002 (SOA), controlling for macroeconomic variables. Using the logistic regression with proxy betas to alleviate the incompatibility problem between the firm-specific financial ratios and macroeconomic indicators, we report evidence that financial ratios are meaningful predictors of stock price changes, which subdue the influence of macroeconomic indicators on stock returns, and more importantly that the SOA truly improves the stock price predictability of financial ratios for the markup sample. The empirical results further suggest that industry and time effects exist and that for the markdown sample the SOA actually deteriorates the predictive power of financial ratios.
Keywords
Financial Ratios; Macroeconomic Variables; Sarbanes-Oxley Act; Proxy Beta; Logistic Regression;
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