Are Stock Prices Aligned with Investors’ Expectations? Evidence from Financial Sector

Abstract

Stock prices change as news become available about businesses; the change in price process is a reflection of financial markets’ expectations about firms’ performance. Consequently both, financial measures & fundamental measures change as a result. Researchers explored how well the financial measures explain firms’ performance and future stock price movements. The purpose of this study is to explore if the volatility of financial measures are better predictors of stock price movements – an empirical evidence from the financial sector during 2008 market correction. Study develops a two-step scenario is developed; 1- The first step examines the use of the financial measures as leading measures to project stock price movement during 1998 and 2007 period. 2- The second step examines the co-movement of financial measures volatility with stock prices during the same period. Study shows evidence that the co-movement between Price/ Book volatility and that of stock price during 2008 market correction is significant and consistent across the six main financial industries.