Journal of Finance and Accounting
ISSN (Print): 2333-8849 ISSN (Online): 2333-8857 Website: http://www.sciepub.com/journal/jfa Editor-in-chief: Apply for this position
Open Access
Journal Browser
Go
Journal of Finance and Accounting. 2018, 6(1), 27-33
DOI: 10.12691/jfa-6-1-4
Open AccessArticle

Financial Statement Analysis to Predict Stock Returns of Listed Consumer Goods Firms in Nigeria

Clement C. M. Ajekwe1 and Adzor Ibiamke1,

1Department of Accounting, Benue State University, Makurdi

Pub. Date: August 19, 2018

Cite this paper:
Clement C. M. Ajekwe and Adzor Ibiamke. Financial Statement Analysis to Predict Stock Returns of Listed Consumer Goods Firms in Nigeria. Journal of Finance and Accounting. 2018; 6(1):27-33. doi: 10.12691/jfa-6-1-4

Abstract

This study examines whether the application of an accounting fundamental strategy to select stocks of a portfolio can systematically yield significant and positive excess market buy-and-hold returns after one year of portfolio formation. Using financial statement information and the “direct approach”, multiple logit models were developed to predict the year-ahead returns. The coefficient estimates of these models were used to generate Pr measures which were used to formulate investment strategies. Specifically, the investment strategy involved buying stocks with high Pr values and selling stocks with low Pr values was examined. The study found that eleven accounting ratios predict stock returns accurately in 76.6% of the cases. This robust ability to accurately predict stock returns is evidence that conducting fundamental analysis and taking investment positions on the basis of Pr values can be a fruitful strategy for investors in Nigeria. Thus, the study recommends that investors evaluate their investments in equity for 12 months before making a buy or sell decision using a Pr strategy to avoid loses or missing opportunities.

Keywords:
financial statement analysis future returns investment strategy Logit regression Nigeria

Creative CommonsThis work is licensed under a Creative Commons Attribution 4.0 International License. To view a copy of this license, visit http://creativecommons.org/licenses/by/4.0/

References:

[1]  Cleary, S. (2001). Canadian Securities Exam: Fast-Track Study Guide. Ontario: John Wiley and Sons Canada.
 
[2]  Aggarwal, N. and Gupta, M. (2009). Do high book-to-market stocks offer returns to fundamental analysis in India? Decision, 36(2), 155-175.
 
[3]  Richardson, S., Tuna, I. and Wysocki, P. (2010). Accounting anomalies and fundamental analysis: A review of recent research advances. Journal of Accounting & Economics, 50(2-3), 410-454.
 
[4]  Sloan, R. G. (1996). Do stock prices fully reflect information in accruals and cash flows about future earnings? The Accounting Review, 71(3), 289-315.
 
[5]  Xie, H. (2001). The mispricing of abnormal accruals. The Accounting Review, 76(3), 357-373.
 
[6]  Abarbanell, J. S. and Bushee, B. J. (1998). Abnormal Returns to a Fundamental Analysis Strategy. The Accounting Review, 73, 19-45.
 
[7]  Kothari, S. P. (2001). Capital market research in accounting. Journal of Accounting and Economics, 31(1), 105-231.
 
[8]  Ou, J. A. and Penman, S. H. (1989). Financial Statement Analysis and the Prediction of Stock Returns. Journal of Accounting and Economics, 11, 295-329.
 
[9]  Setiono, B. and Strong, N. (1998). Predicting Stock Returns using Financial Statement Information. Journal of Business and Accounting, 25, 631-657.
 
[10]  Charitou, A. and Panagiotides, G. (1999). Financial analysis, future earnings and cash flows, and the prediction of stock returns: evidence for the UK. Accounting and Business Research, 29:4, 281-298.
 
[11]  Kallunki,J., Martikainen, M., Martikainen, T. & Yli-Olli, P. (1997). The Finnish Stock Market: A Survey of Some Empirical Evidence and its Practical Relevance. Retrieved from http://lta.lib.aalto.fi/1997/4/lta_1997_04_s5.pdf on 27/06/2018.
 
[12]  Goslin, J., Chai, D. and Guasekarage, A. (2012). The Use of Financial Statement Information in Predicting Stock Returns: New Zealand Evidence. Australian Accounting, Business and Finance Journal, 6(2): 51-70.
 
[13]  Dosamantes, C. A. and Alberto, C. (2013). The Relevance of using Accounting Fundamentals in Mexican Stock Market. Journal of Economics, Finance and Administrative Science, 18, 2-10.
 
[14]  Caneghan, T. and Campenhout, G. (2002). Financial Statement Information and the Prediction of Stock Returns in a Small Capital Market: The Case of Belgium. Brussels Economic Review, 43(3): 65-90.
 
[15]  Holthausen, R. W. and Larcker, D. F. (1992). The Prediction of Stock Returns using Financial Statement Information. Journal of Accounting and Economics, 15, 373-411.
 
[16]  Greig A. (1992). Fundamental Analysis and Subsequent Stock Returns. Journal of Accounting and Economics, 15, 413-442.
 
[17]  Ball, R. (1992). The Earnings-price Anomaly. Journal of Accounting and Economics, 15, 319-345.
 
[18]  Piotroski, J. (2000). Value Investing: The Use of Historical Financial Statement Information to Separate Winners from Losers. Journal of Accounting Research, 38, 1-41.