A Panel Data Analysis of Stock Returns and Accounting Information in Indian Paint Industry

Abstract

The accounting ratios and published financial information serve as a critical tool for investors, creditors, and other stakeholders to ascertain companies' profitability, control, and financial status, which may significantly impact the Stock returns and performance on exchanges. This paper aims to examine whether crucial accounting information affects the price of paint companies in India. In this paper, nine-years (2012-2020) accounting ratios such as returns on asset, equity, and cash cycles for the five listed paint companies in India as explanatory (independent) variables to estimate stock returns. Secondary data is collected chronologically and at a regular yearly frequency. Variables data are derived from the company’s financial statements, Stock Exchange and related website. The study aims to assess and elaborate these accounting ratios effectiveness to substantiate the stock returns of these listed companies. The study uses three-panel data models, the pooled OLS, fixed and random effects, to assess stock returns for the cross-sectional data of these five paint companies. This research indicates that accounting information is significant and positively affects the price of Paint company stock returns on the stock exchange. Both Fixed and Random effect model found to fit the data, significance level of 0.05 (Fixed (FE) at F= 6.3625, p<0.000 and R2 of 0.5462, i.e., fixed effect elaborates for about 55% of the return variance. Random effect at F=10.8647 and p<0.000 and R2 of 0.4429, i.e., elaborates for about 44% of stock return variance. Based on the Hausman data test alternative hypothesis is found to be consistent and therefore Random Effect (RE) model is being used to conclude the findings. The paper's fundamental limitation includes use of limited regressors, companies, and time period. A further qualitative analysis together with other accounting performance indicators as regressors may be included in future studies. These ratios include interest coverage, debt ratios, effective tax rates, asset turnover ratios, dividend distribution ratios, sustainable growth, and top line revenue growth.