Financial Ratios and Stock Prices: Evidence from Existing Literature

Abstract

Aims: This paper presents a systematic evaluation of research examining the impact of corporate fundamentals on share prices across various stock markets. The primary objective of the research is to develop a reference model that delineates the probable relationship  between firm-specific fundamental variables and their positive and negative impacts on share prices/returns. Sample and Study Design: Over 100 research papers have been aggregated from credible sources and categorized by study type, country, studied factors, research methodology, analytical data, and findings, with implications for future research. Methodology: The compilation of positive and negative linkage counts of the significant variables produces a reference model. In constructing a reference model, the proportion of positive to negative findings must exceed two-thirds (66%) of the total significant ratios identified in previous research conducted from 2011 to 2021 to validate the relationship between the dependent (share prices/returns) and independent variables. Findings: Fourteen variables, including EPS, ROA, ROE, P/B, SIZE, and other financial ratios, were identified as the most pertinent among the 32 company-specific variables. Conclusion: Utilizing empirical data, the study develops a reference model that investors can use to select stocks and devise investment strategies based on the company-specific dynamics illustrated in the theoretical model established. These predictors, however, require additional empirical research to confirm their reliability within the Indian stock market context.