Feasibility of Forecasting Stock Returns under Mispricing Valuation of Financial Information Condition

Document Type : Research Paper

Authors

1 Assistant Professor of Accounting, Shahroud University of Technology, Faculty of Industrial Engineering and Management Shahroud, Shahroud, Iran

2 Assistant Professor of Financial Management, Department of Management, Economics and Accounting, Faculty of Humanities and Social Sciences, Golestan University, Gorgan, Iran.

3 Assistant Professor of Economics, Department of Management and Economics, Faculty of Humanities and Social Sciences, Golestan University, Gorgan, Iran.

10.22111/ijbds.2024.47960.2095

Abstract

This study examined the extent to which stock returns can be explained by fundamental financial information. To this end, the accuracy of predicting future stock returns under conditions of mispricing stocks, including underpriced and overpriced stocks, was evaluated. The empirical results are based on a sample of 140 companies listed on the Tehran Stock Exchange during 2006-2022. The applied methodology is based on multivariate regression analysis of panel data. In particular, the six-factor models of Fama-French (2018), Nichols-Wallen-Wyland (2017), and Rhodes croft-Robinson-Viswanathan (2005) have been calculated to investigate the extent of explaining future stock valuation and returns. The results show that most of the changes in the stock valuation of the investigated companies are explained by using fundamental financial factors. Specifically, the results indicate that undervalued companies have earned higher stock returns in the coming year compared to overvalued companies. In other words, in undervalued companies, the stock return has increased in the following year, and in overvalued companies, the future stock return has decreased. According to the provided results, investors and stock exchange regulatory bodies are advised to more sensitively examine companies that have a lower rating of incorrect stock valuation based on the models introduced in this research.

Keywords

References

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