Influencing Factors of Stock Return - Essay Example

The Empirical Research of Influencing Factors of Stock Return

Based on the existing research findings it shows that the stock market is not the single factor model basically set up in the stock market today, there is too much factors that affect stock returns. This includes both public disclosures information and rational analysis of stock market trading, including many irrational factors, such as herding and financial investment many psychological factors. To find so many factors sufficient enough to fully describe the factors that change the stock yields, and build a model that can fully explain stock returns is basically impossible. This paper attempts to study the impact of stock returns to the industry factor and co-operate governance trying to explain the factors that influence stock returns to a certain extent.

1 The basic idea

In the study of factors that affect stock returns in co-operates, many Chinese scholars have used a variety of research methods. (Wang Dawei, Wang Xue standard 2008), they are; company fundamentals, market liquidity factors and macro levels in three dimensions. It started by analyzing of a total company profitability, stock liquidity, company size, market liquidity, interest rate, inflation rate six indicators, and empirical analysis by factors establish panel data model for stock returns. Some empirical analysis conclusions were different from previous studies: scale, liquidity premium theory in China's stock market has not been supported by the empirical. Wang Dawei, Xue standard uses panel data model to study the stock returns, but a limited number of selected indicators, and the macro factors, regardless of the level unified in a panel data model among its conclusions of doubtful reliability. On the basis of previous work( Xuanjuan Chen, et al. 2010) using the company's market capitalization, book value of the countdown, the stock momentum, earnings reciprocal cash flow price ratio, revenue growth, accruals, net working capital, capital expenditures, research and development expenses, advertising expenses, asset growth, change in gross profit margin, cash flow equity financing, debt financing cash flow, idiosyncratic risk and liquidity 18 specific variables, from 1995 to 2007 in China a-share market data do cross-sectional regression.

The regression results found that only 5 variables yields Chinese stock market has forecast function, respectively, the book value of the countdown, net working capital, research and development costs, asset growth and liquidity. Xuanjuan Chen et believes that China's stock market yield impact factor is not a significant degree of heterogeneity in the distribution of its inadequate information in Chinese stock market and in the stock price variable contained. This is according to Xuanjuan Chen and other studies with high comprehensiveness, but the method they used is still sort of Fama and French classification structure known as the portfolio method, the research has focused on cross-sectional data and time-series light effects.

Comprehensive predecessors can be found in past research on the stock yield which was mainly using cross-sectional regression method. With respect to the cross-sectional regression, panel data regression in the control of individual heterogeneity, explain certain economic relations, the study of dynamic adjustment process and other aspects have certain advantages. At the same time the basis of previous studies were analyzed on, and can be found in previous studies which focused on changes in the overall market for micro-individual attention that is not sufficient, but one of the advantages of panel data regression is the ability of microscopic individuals to have it more accurately measured. Therefore, this paper introduces the panel data regression factors on stock returns which were analyzed. In addition, the previous studies scholars of the factors affecting stock returns who were in few corporate governance structures will be added as an explanatory variable in the regression model, but more concerned about the company's financial data and stock transactions.

Previous studies showed that the corporate governance structure of listed companies will conduct an impact, thereby affecting its stock price and stock returns (Lei Guangyong, Wang, Jin Xin 2012). In China A-share companies using 2006 to 2009 data, the results shows that the level of investor confidence is the result of market factors and firm-level factors working together. The higher the quality of corporate governance, the stronger external investor confidence. Changes in investor confidence in investment behavior is formed by an impact on premium stock returns, this positive effect is enhanced in the high quality of governance of the company, the high quality of governance in companies investor confidence is stronger, the greater the return on equity (Jiang Guohua, Yue Heng 2005) by examining the major shareholders during the occupation from 1996 to 2002 data funds of listed companies found that most of the major shareholder of the company funds used in portfolio investment returns over the coming year in the range of -0.26% per month on average ( -3.12% per year), while funds used the lowest corporate portfolio was 0.54% (6.48% per year).

Based on previous research, select the listed company's financial health, industry and corporate governance factors in three areas as a starting point, the impact on stock earnings factors were analyzed. Specifically respectively selected from the three aspects of a number of explanatory variables, panel data model to build on the impact of stock returns microscopic level and its empirical research. On the basis of the whole model regression analysis, correlation analysis of variables, trying to obtain the most accurate to reflect the factors of stock returns, and the whole model is reconstructed. Finally, in constructing the panel data model stock returns and its regression analysis, horizontal comparison similarities and differences in different sectors of the stock returns.

Table 1 Basic Thought of Paper

Determinants of stock returns can be decomposed into two parts, namely the company's internal and external environment. Internal environment including governance structure of the company's financial situation and the company's external environment is the stock market environment, including the operation of the stock market and stock market substitute products market operation and so on. All of these factors combined effect of different paths through the formation mechanism of the volatility of stock returns, in theory; it can determine the level of stock returns to a certain extent.

Relatively speaking, the company's internal environment that seems to affect stock returns is much more direct paper that will house the company's financial data into the environment and corporate governance structure, analyze them separately. Listed companies are using to raise funds by issuing securities, and the use of funds raised over the production activities and generate revenue, the company's investors, the shareholders in the future be able to obtain greater benefits. The report released by listed companies to fully reflect its internal environment, investors get companies usually an important source of financial information, but also the value of the company's investors to determine the important basis, so widespread that it concerns investors. Financial data and corporate governance structure of listed companies although generally only the individual can affect the company's stock performance, the entire stock market or other shares of listed companies have little effect, but it can objectively reflect the status of the listed company's management operations and business efficiency, so internal environment should be a very important individual stocks rats.

Through the above analysis, this paper intends to take a combination of internal and external, factors that will affect stock returns in a comprehensive panel data model. This paper selects industry, turnover, ownership concentration, current ratio, debt ratio, return on equity, free cash flow, the main business revenue growth, total asset turnover, net assets per share, the total market capitalization and earnings rate of 12 indicators, structural balance panel data regression analysis.

2 design variables and assumptions

Based on the above logic system, and by expanding research on the theory, the paper selects listed companies' financial health, industry and corporate governance factors in three areas were selected representative stock index to a certain extent determines yield, and according to the actual situation We need to design appropriate indicators and mathematical process to enable it to objectively reflect the real situation.

Table 2 Description of Variables

variable

Variable Code

Definition

Stock returns

SRR

Ownership Concentration

OSC

Current Ratio

FR

Debt to asset ratio

ALR

ROE

RNA

Free Cash Flow

FCF

Main business growth

MBR

Total asset turnover

TRA

Net assets per share

NAS

total market capitalization

TAV

industry

Industry

Turnover

Volume

Annual rate of return

YRR

This chapter summarizes the basic factors affecting stock returns of the relevant research literature on the comprehensive advantages of the previous method, to avoid insufficiency in previous methods, collate and analyze their own for stock returns influencing factors which were analyzed ideas. Subsequently, the paper selected from the listed company's financial health, industry factors and corporate governance standpoint of three, selected 12 test variables analyzed, and the corresponding assumptions.

This paper put forward the hypothesis of these indicators:

Hypothesis 1: The higher the current ratio of the company, its short-term liquidity is stronger, but also the lower the risk of bankruptcy, so the stock returns should be lower.

Hypothesis 2: The high rate of company assets and liabilities, its ratio of debt to total assets of higher risk are also facing greater potential and therefore should have a higher stock returns.

Hypothesis 3: Different industries companies have different stock returns.

Hypothesis 4: The higher the concentration of ownership of the company the more may face agency problems, resulting in fund utilization efficiency which is lowered, resulting in the stock yields lower.

Hypothesis 5: free cash flow of the company higher liquidity risk, stock returns should be lower.

Hypothesis 6: The higher the total asset turnover, operational capacity, the stronger, the stock yields should be higher.

Hypothesis 7: high turnover of the company and operating strength the higher the stock returns.

Hypothesis 8: The higher ROE of the company, then its profitability becomes stronger; the stock returns should be higher.

Hypothesis 9: Main business revenue growth higher, the stronger its profit growth and the stock returns should be higher than other companies.

Hypothesis 10: Net assets per share were positively correlated with stock returns.

Hypothesis 11: The higher the market capitalization of companies the lower the stock returns.

Hypothesis 12: the higher the annual rate of return, the higher a company stock returns.