Dear community. I am performing finance based research to determine if statistical significant relationships exist between financial ratios and share price performance of different sectors on a stock exchange. I am using multiple regression analysis where my dependent variable is set as the % change in the share price from year to year. I am however in two minds regarding the independent variable.
Question: Would the financial ratios on their own suffice as the independent variables OR would the percentage change in financial ratios from the previous year be better suited for multiple regression analysis.
Dear Milan B. Vemić
thank you for the responseI am more pro to your suggestion on using the financial ratios on a standalone basis as is.
The reason for considering the percentage change in financial ratios is as some ratios for example net profit margin might be negative in a period for example -20%, where in the next period this ratio improves to say -5% even though it is still negative.
Share prices between these periods might increase even though the current ratio is still negative. When using the -5% ratio on a standalone basis compared to say a 10% increase in shareprice it might seem like negative ratios are correlated to share price increases which is not the case. Finance literature for example Piotroski F-Score further mainly uses percentage change in financial ratio. What are your thoughts on this?
Thank you very much Milan B. Vemić
for your assistance and for sharing your thoughts on this. All of the best!- Badges
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