Investigating the Interplay between Firm Financials and Stock Returns

This thesis offers a comprehensive examination of how various financial metrics influence stock returns across technology, finance, and agriculture sectors, yielding nuanced insights into the interplay between firm financials and market performance.

In the technology sector, key findings suggest that while traditional financial ratios such as return on equity and debt-to-equity ratios show limited predictive power for stock returns, metrics related to the level of interest-bearing debt are significant. Particularly, high levels of debt negatively impact stock returns, underscoring the sector’s sensitivity to financial structure and market conditions.

The financial sector analysis reveals that the book-to-market ratio has a significant positive impact on stock returns, suggesting a preference for value stocks within this sector. Other financial metrics, however, do not show a strong correlation with returns, reflecting the complex influences of regulatory and economic environments on financial firms.

In contrast, the agriculture sector displays a distinct sensitivity to financial metrics. Both the book-to-market ratio and accruals significantly affect stock returns, with a higher book-to-market ratio indicating potential undervaluation by the market and negative accruals highlighting the importance of cash flow over reported earnings.

Portfolio analysis extends these insights, showing that macroeconomic trends such as real GDP and private domestic investment affect sector-specific portfolios differently. Real GDP notably predicts returns in the agriculture sector effectively but is less impactful for technology and financial sectors. Similarly, private domestic investment is found to significantly boost returns in the agriculture sector, emphasizing its capital-intensive nature and dependency on local economic conditions.

Furthermore, the analysis of portfolios against broader economic indicators like the sticky price index and the Fama-French three factors illustrates varying sector responses. The sticky price index, for instance, significantly influences technology sector returns but has a minimal impact on agriculture and financial sectors. These findings underscore the importance of tailoring investment strategies to sector-specific dynamics and the need for investors and policymakers to consider a broad array of financial metrics and economic conditions when making decisions.