Fundamental analysis and its predictive power in forecasting stock returns: evidence from Dow Jones Industrial Average (DJIA)

Abstract

The aim of this paper will be achieved through analysis of data for the 8-year period from 2009 to 2016 for all 30 companies listed on the Dow Jones Industrial Average (DJIA). The analysis utilizes eight indicators aiming to provide information regarding four areas of a company’s operations i.e profitability ratios: return on assets (ROA) and return on equity (ROE); liquidity ratios (Current Ratio); Leverage Ratio (Debt to Equity) and Market-based ratios earnings per share (EPS), dividend per share (DPS), price to book ratio (P/B), price-earnings ratio (P/E). The results from our model indicate that fundamental analysis is weak given that results designate insignificant relationship between most of the explanatory variables and the stock returns.