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


- Cao, Z., Chelikani, S., Kilic, O., & Wang, X. Implied volatility spread and stock mispricing. Journal of Behavioral Finance, 2022, 1-13.‏
-Cao, C., Chen, Y., Goetzmann, W. N., & Liang, B.. Hedge funds and stock price formation. Financial Analysts Journal, 2018, 74(3), 54-68.‏
-DeLisle, J., Diavatopoulos, D., Fodor, A., & Kassa, H.. Variability of Mispricing Characteristics and Future Stock Returns. 2022, Available at https://ssrn.com/abstract=4230487.‏
-Fama, E. F., & French, K. R. Common risk factors in the returns on stocks and bonds. Journal of financial economics, 1993, 33(1), 3-56.‏
-Fisher, I. The Nature of Capital and Income. New York: Cosimo Classics, 1906.
-Firouzi, H & Aram, M. Unsystematic volatility, returns and incorrect stock pricing. Journal of New Research Approaches in Management and Accounting, 2021, 138-160.
-Hanauer, M. X., Kononova, M., & Rapp, M. S. Boosting agnostic fundamental analysis: Using machine learning to identify mispricing in European stock markets. Finance Research Letters, 2022, 48, 102856.‏
-Hendriksen, E & Van Breda, M. Accounting Theory. Illinois, Richard D Irwin, nc., Homewood, Illinois, 1982, 4.
-Kimiagari, A. M, B, Gh. E, Eskandari, M. Test of the Fama-French Three-Factor Model in Tehran Stock Exchange. Financial Research Journal, 2007, 9(23), doi: 1001.1.10248153.1386.9.23.5.0.
-Klevmar Preda, L., & Lyckhage, M. R&D Expenditures and Subsequent Market Performance.‏ 2021,
-Lee, J. Information asymmetry, mispricing, and security issuance. The Journal of Finance, 2021, 76(6), 3401-3446.‏
-Li, W., Yang, X., & Yin, X. Non-state shareholders entering of state-owned enterprises and equity mispricing: Evidence from China. International Review of Financial Analysis, 2022,  84, 102362.‏
-Nakhai, H & Hassanzadeh, B. 2020, An income based on capital structure. New researches in management and accounting, 3 (25), 87-99.
-Nichols, D. C., Wahlen, J. M., & Wieland, M. M. Pricing and Mispricing of Accounting Fundamentals in the Timeā€Series and in the Cross Section. Contemporary Accounting Research, 2017, 34(3), 1378-1417.‏
-Niko, Haniyeh; Ebrahimi, Seyed Kazem & Jalali, Fatemeh. Investor's emotional tendency, unsystematic volatility and incorrect stock pricing in companies listed on Tehran Stock Exchange. Financial management strategy, 2020, 28(8), 85-65.
-Oestreicher, C.. A history of chaos theory. Dialogues in clinical neuroscience, 2007, 9(3), 279-289.‏
-Raei, R & Talangi, A. Advanced investment management. Samt public, Tehran, Iran, 2008.
-Rahman, M. A. Forecasting stock prices on the basis of technical analysis in the industrial sectors of the UK stock market, Doctoral dissertation, Cardiff Metropolitan University, 2021, https://figshare.cardiffmet.ac.uk.
-Ramezani, J., & Kamyabi, Y. Evaluate the effect of momentum the explanatory models feature five factors in explaining stock returns. Financial Knowledge of Securities Analysis, 2017, 36(10), 45-57.
-Rhodes–Kropf, M., Robinson, D. T., & Viswanathan, S. Valuation waves and merger activity: The empirical evidence. Journal of financial Economics, 2005, 77(3), 561-603.‏
-Saghafi, A., & Sheri, S. Role of Fundamental Accounting Information in Predicting Stock Return. Empirical Studies in Financial Accounting, 2004, 2(8), 87-120.‏
-Shen, H., Zheng, S., Xiong, H., Tang, W., Dou, J., & Silverman, H. Stock market mispricing and firm innovation based on path analysis. Economic Modelling, 2021, 95, 330-343.‏
-Usman, M. Price efficiency, bubbles, crashes and crash risk: evidence from Chinese stock market. Prague Economic Papers, 2022, 30(3-4), 236-258.‏
-Walkshäusl, C. Predicting stock returns from the pricing and mispricing of accounting fundamentals. The Quarterly Review of Economics and Finance, 2021, 81, 253-260.‏
-Watts, R. L., & Zimmerman, J. L. (1986). Positive accounting theory.‏ 1986, https://ssrn.com/abstract=928677.-