Stock Returns Indicators: Debt to Equity, Book to Market, Firm Size and Sales to Price

Abstract

Financial variables are useful indicator for future stock returns. In the USA market during the period of 1963-90 the book to market value and firm size have more explanatory power for future stock returns. But some studies argue that sales to price ratio and debt to equity explain future stock returns better than the book to market value and firm size.  The main objective of this study is to see which financial variable explains stock returns better than the others. In this study the four financial variables debt to equity, book to market value of equity, firm size and sale to price are used. The study includes   26 companies from pharmaceutical and chemical sector in Pakistan and listed on the Karachi Stock Exchange. The regression technique is used to see the relationship between stock returns and financial variables. We find that the best indicator for stock returns in Pakistani stock market is book to market value of equity for the studied period 2000-2009.