Valuation Ratios and Profitability as Predictors of High Returns: Evidence from the Taiwan Stock Market
Downloads
This study investigates the financial determinants of high stock returns, defined as quarterly returns exceeding 20%, in the Taiwan equity market. Using binary logistic regression models, we assess the predictive power of valuation ratios (P/E, P/B, and P/S) and profitability (ROE), under both contemporaneous and one-period lagged specifications.
The empirical results reveal that ROE is a consistently strong predictor, with odds ratios indicating a 1–3% increase in the likelihood of high returns per unit increase in profitability. The P/B ratio also shows statistically significant and economically meaningful effects in contemporaneous models, but its predictive value weakens in lagged models. In contrast, the P/E and P/S ratios provide little forward-looking information, especially when lagged.
Industry classification, as captured by a dummy variable for electronics firms (ELEC), adds explanatory power, with odds ratios suggesting that electronics firms are significantly more likely to deliver high returns. Overall, the findings emphasize the superior predictive value of profitability over valuation ratios in identifying near-term outperformers.
Bali, T. G., Cakici, N., & Whitelaw, R. F. (2011). Maxing out: Stocks as lotteries and the cross-section of expected returns. Journal of Financial Economics, 99(2), 427–446.
https://doi.org/10.1016/j.jfineco.2010.08.014
Barber, B. M., & Lyon, J. D. (1997). Firm size, book-to-market ratio, and security returns: A holding period analysis. Financial Analysts Journal, 53(4), 23–38. https://doi.org/10.2469/faj.v53.n4.2084
Chen, Y.-C., Hsu, M.-Y., & Huang, C.-W. (2019). Predicting Stock Returns Using Combined Valuation and Profitability Indicators: Evidence from Taiwan. Emerging Markets Finance & Trade, 55(6), 1231–1248. https://doi.org/10.1080/1540496X.2018.1527939
Fama, E. F., & French, K. R. (1992). The cross-section of expected stock returns. *The Journal of Finance, 47*(2), 427–465.. The cross‐section of expected stock returns. The Journal of Finance, 47(2), 427–465.
https://doi.org/10.1111/j.1540-6261.1992.tb04398.x
Jegadeesh, N., & Titman, S. (1993). Returns to buying winners and selling losers: Implications for stock market efficiency. The Journal of Finance, 48(1), 65–91. https://doi.org/10.1111/j.1540-6261.1993.tb04702.x
Lakonishok, J., Shleifer, A., & Vishny, R. W. (1994). Contrarian investment, extrapolation, and risk. The Journal of Finance, 49(5), 1541–1578. https://doi.org/10.1111/j.1540-6261.1994.tb04772.x
Novy-Marx, R. (2013). The other side of value: The gross profitability premium. *Journal of Financial Economics, 108*(1), 1–28. Journal of Financial Economics, 108(1), 1–28.
https://doi.org/10.1016/j.jfineco.2013.01.003
Penman, S. H., & Reggiani, F. M. (2013). Returns to buying earnings and book value: Accounting for growth and risk. Review of Accounting Studies, 18(4), 1021–1049.
