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  is a stock exchange located at Mumbai, India. It is the 9th
largest stock exchange in the world by market capitalization and largest in India by daily
turnover and number of trades, for both equities and derivative trading. NSE has a market
capitalization of around US$1.59 trillion and over 1,552 listings as of December 2010. Though a
number of other exchanges exist, NSE and the Bombay Stock Exchange are the two most
significant stock exchanges in India, and between them are responsible for the vast majority of
share transactions. The NSE's key index is the S&P CNX Nifty, known as the
NSE NIFTY (National Stock Exchange Fifty), an index of fifty major stocks weighted by market
capitalization.

NSE is mutually-owned by a set of leading financial institutions, banks, insurance companies

and other financial intermediaries in India but its ownership and management operate as separate
entities. There are at least 2 foreign investors NYSE Euronext and Goldman Sachs who have
taken a stake in the NSE. As of 2006, the NSE VSAT terminals, 2799 in total, cover more than
1500 cities across India. NSE is the third largest Stock Exchange in the world in terms of the
number of trades in equities. It is the second fastest growing stock exchange in the world with a
recorded growth of 16.6%.
  

The National Stock Exchange of India was promoted by leading Financial institutions at the
behest of the Government of India, and was incorporated in November 1992 as a tax-paying
company. In April 1993, it was recognized as a stock exchange under the Securities Contracts
(Regulation) Act, 1956. NSE commenced operations in the Wholesale Debt Market (WDM)
segment in June 1994. The Capital market (Equities) segment of the NSE commenced operations
in November 1994, while operations in the Derivatives segment commenced in June 2000.



Currently, NSE has the following major segments of the capital market:

*V Equity
*V Futures and Options
*V Retail Debt Market
*V Wholesale Debt Market
*V Currency futures
*V MUTUAL FUND
*V STOCKS LENDING & BORROWING


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Ratio analysis is the method or process by which the relationship of items or group of items in
the financial statement are computed, determined and presented.
Ratio analysis is an attempt to derive quantitative measure or guides concerning the
financial health and profitability of business enterprises. Ratio analysis can be used both in trend
and static analysis. There are several ratios at the disposal of an annalist but their group of ratio
he would prefer depends on the purpose and the objective of analysis.

OBJECTIVE OF RATIOS
Ratio is work out to analyze the following aspects of business organization-

A)V Solvency-
1)V Long term
2)V Short term
3)V Immediate
B)V Stability
C)V Profitability
D)V Operational efficiency
E)V Credit standing
F)V Structural analysis
G)V Effective utilization of resources
H)V Leverage or external financing

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Since a ratio is a mathematical relationship between to or more variables / accounting

figures, such relationship can be expressed in different ways as follows ±

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 For example the equity share capital of a company is Rs. 20,00,000 & the preference
share capital is Rs. 5,00,000, the ratio of equity share capital to preference share capital is
20,00,000: 5,00,000 or simply 4:1.

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In the above case the equity share capital may also be described as 4 times that of
preference share capital. Similarly, the cash sales of a firm are

Rs. 12,00,000 & credit sales are Rs. 30,00,000. so the ratio of credit sales to cash sales can be
described as 2.5 [30,00,000/12,00,000] or simply by saying that the credit sales are 2.5 times
that of cash sales.

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In such a case, one item may be expressed as a percentage of some other item. For
example, net sales of the firm are Rs.50,00,000 & the amount of the gross profit is Rs. 10,00,000,
then the gross profit may be described as 20% of sales [ 10,00,000/50,00,000]


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The ratio analysis requires two steps as follows:

1] Calculation of ratio

2] Comparing the ratio with some predetermined standards. The standard ratio may be the past
ratio of the same firm or industry¶s average ratio or a projected ratio or the ratio of the most
successful firm in the industry. In interpreting the ratio of a particular firm, the analyst cannot
reach any fruitful conclusion unless the calculated ratio is compared with some predetermined
standard. The importance of a correct standard is oblivious as the conclusion is going to be based
on the standard itself.

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The ratio can be compared in three different ways ±

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One of the way of comparing the ratio or ratios of the firm is to compare them with the
ratio or ratios of some other selected firm in the same industry at the same point of time. So it
involves the comparison of two or more firm¶s financial ratio at the same point of time. The
cross section analysis helps the analyst to find out as to how a particular firm has performed in
relation to its competitors. The firms performance may be compared with the performance of the
leader in the industry in order to uncover the major operational inefficiencies. The cross section
analysis is easy to be undertaken as most of the data required for this may be available in
financial statement of the firm.

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The analysis is called Time series analysis when the performance of a firm is evaluated
over a period of time. By comparing the present performance of a firm with the performance of
the same firm over the last few years, an assessment can be made about the trend in progress of
the firm, about the direction of progress of the firm. Time series analysis helps to the firm to
assess whether the firm is approaching the long-term goals or not. The Time series analysis looks
for (1) important trends in financial performance (2) shift in trend over the years (3) significant
deviation if any from the other set of data\

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If the cross section & time analysis, both are combined together to study the behavior &
pattern of ratio, then meaningful & comprehensive evaluation of the performance of the firm can
definitely be made. A trend of ratio of a firm compared with the trend of the ratio of the standard
firm can give good results. For example, the ratio of operating expenses to net sales for firm may
be higher than the industry average however, over the years it has been declining for the firm,
whereas the industry average has not shown any significant changes.
 

The combined analysis as depicted in the above diagram, which clearly shows that the ratio of
the firm is above the industry average, but it is decreasing over the years & is approaching the
industry average.

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In order to use the ratio analysis as device to make purposeful conclusions, there are
certain pre-requisites, which must be taken care of. It may be noted that these prerequisites are
not conditions for calculations for meaningful conclusions. The accounting figures are inactive in
them & can be used for any ratio but meaningful & correct interpretation & conclusion can be
arrived at only if the following points are well considered.

1)V The dates of different financial statements from where data is taken must be same.
2)V If possible, only audited financial statements should be considered, otherwise there must
be sufficient evidence that the data is correct.
3)V Accounting policies followed by different firms must be same in case of cross section
analysis otherwise the results of the ratio analysis would be distorted.
4)V One ratio may not throw light on any performance of the firm. Therefore, a group of
ratios must be preferred. This will be conductive to counter checks.
 5)V Last but not least, the analyst must find out that the two figures being used to calculate a
ratio must be related to each other, otherwise there is no purpose of calculating a ratio.

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BASED ON FINANCIAL BASED ON FUNCTION BASED ON USER

STATEMENT

1] BALANCE SHEET 1] LIQUIDITY RATIO 1] RATIOS FOR

RATIO 2] LEVERAGE RATIO SHORT TERM
2] REVENUE 3] ACTIVITY RATIO CREDITORS
STATEMENT 4] PROFITABILITY 2] RATIO FOR
RATIO RATIO SHAREHOLDER

3] COMPOSITE 5] COVERAGE 3] RATIOS FOR

RATIO RATIO MANAGEMENT

4] RATIO FOR
LONG TERM
CREDITORS

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 As a tool of financial management, ratios are of crucial significance. The importance of
ratio analysis lies in the fact that it presents facts on a comparative basis & enables the drawing
of interference regarding the performance of a firm. Ratio analysis is relevant in assessing the
performance of a firm in respect of the following aspects:

1] Liquidity position,

2] Long-term solvency,

3] Operating efficiency,

4] Overall profitability,

5] Inter firm comparison

6] Trend analysis.

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With the help of Ratio analysis conclusion can be drawn regarding the liquidity position
of a firm. The liquidity position of a firm would be satisfactory if it is able to meet its current
obligation when they become due. A firm can be said to have the ability to meet its short-term
liabilities if it has sufficient liquid funds to pay the interest on its short maturing debt usually
within a year as well as to repay the principal. This ability is reflected in the liquidity ratio of a
firm. The liquidity ratio are particularly useful in credit analysis by bank & other suppliers of
short term loans.

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Ratio analysis is equally useful for assessing the long-term financial viability of a firm.
This respect of the financial position of a borrower is of concern to the long-term creditors,
security analyst & the present & potential owners of a business. The long-term solvency is
measured by the leverage/ capital structure & profitability ratio Ratio analysis s that focus on
earning power & operating efficiency.

Ratio analysis reveals the strength & weaknesses of a firm in this respect. The leverage
ratios, for instance, will indicate whether a firm has a reasonable proportion of various sources of
finance or if it is heavily loaded with debt in which case its solvency is exposed to serious strain.
Similarly the various profitability ratios would reveal whether or not the firm is able to offer
adequate return to its owners consistent with the risk involved.

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Yet another dimension of the useful of the ratio analysis, relevant from the viewpoint of
management, is that it throws light on the degree of efficiency in management & utilization of its
assets. The various activity ratios measures this kind of operational efficiency. In fact, the
solvency of a firm is, in the ultimate analysis, dependent upon the sales revenues generated by
the use of its assets- total as well as its components.

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Unlike the outsides parties, which are interested in one aspect of the financial position of
a firm, the management is constantly concerned about overall profitability of the enterprise. That
is, they are concerned about the ability of the firm to meets its short term as well as long term
obligations to its creditors, to ensure a reasonable return to its owners & secure optimum
utilization of the assets of the firm. This is possible if an integrated view is taken & all the ratios
are considered together.

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Ratio analysis not only throws light on the financial position of firm but also serves as a
stepping-stone to remedial measures. This is made possible due to inter firm comparison &
comparison with the industry averages. A single figure of a particular ratio is meaningless unless
it is related to some standard or norm. one of the popular techniques is to compare the ratios of a
firm with the industry average. It should be reasonably expected that the performance of a firm
should be in broad conformity with that of the industry to which it belongs. An inter firm
comparison would demonstrate the firms position vice-versa its competitors. If the results are at
variance either with the industry average or with the those of the competitors, the firm can seek
to identify the probable reasons & in light, take remedial measures.

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Finally, ratio analysis enables a firm to take the time dimension into account. In other
words, whether the financial position of a firm is improving or deteriorating over the years. This
is made possible by the use of trend analysis. The significance of the trend analysis of ratio lies
in the fact that the analysts can know the direction of movement, that is, whether the movement
is favorable or unfavorable. For example, the ratio may be low as compared to the norm but the
trend may be upward. On the other hand, though the present level may be satisfactory but the
trend may be a declining one.

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Financial ratios are essentially concerned with the identification of significant accounting
data relationships, which give the decision-maker insights into the financial performance of a
company. The advantages of ratio analysis can be summarized as follows:

±V Ratios facilitate conducting trend analysis, which is important for decision making
and forecasting.
±V Ratio analysis helps in the assessment of the liquidity, operating efficiency,
profitability and solvency of a firm.
±V Ratio analysis provides a basis for both intra-firm as well as inter-firm comparisons.
±V The comparison of actual ratios with base year ratios or standard ratios helps the
management analyze the financial performance of the firm.

The present study investigates the factors that lead to an increase in the value of a firm and as a
consequence contribute to an increase in the shareholders¶ wealth. In particular, this study
focuses on the financial statements figures that influence firms¶ stock value. In addition, it is
examined whether investors take into consideration accounting data when they value firms¶
stock. It is considered the extent to which policies relating to operating, working capital and
financial management influence firms¶ value. The findings of this study can be particularly
helpful for managers and investors. The findings of this study could facilitate firms¶ managers to
identify the strength and weaknesses of the firms they manage. As a result, they would be in a
position to apply the policies that are appropriate for achieving the growth and profit targets they
have set for the firms. On the basis of the findings of this study, shareholders would be in
position to recognize the value drivers of the shares they own. They could evaluate current firm
performance and estimate whether this performance will remain steady or it will change in the
future as a consequence of a change in the strategy of a firm. Investors will be able to detect the
factors that affect stock returns.


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When predicting the future prices of Stock Market securities, there are several theories available.
The first is Efficient Market Hypothesis. In EMH, it is assumed that the price of a security
reflects all of the information available and that everyone has some degree of access to the
information. Fama¶s theory further breaks EMH into three forms: Weak, Semi- Strong, and
Strong. In Weak EMH, only historical information is embedded in the current price. The Semi-
Strong form goes a step further by incorporating all historical and currently public information in
the price. The Strong form includes historical, public, and private information, such as insider
information, in the share price. From the tenets of EMH, it is believed that the market reacts
instantaneously to any given news and that it is impossible to consistently outperform the
market. A different perspective on prediction comes from Random Walk Theory . In this theory,
Stock Market prediction is believed to be impossible where prices are determined randomly and
outperforming the market is infeasible. Random Walk Theory has similar theoretical
underpinnings to Semi-Strong EMH where all public information is assumed to be available to
everyone. However, Random Walk Theory declares that even with such information, future
prediction is ineffective.


 
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It is from these theories that two distinct trading philosophies emerged; the fundamentalists and
the technicians. In a fundamentalist trading philosophy, the price of a security can be determined
through the nuts and bolts of financial numbers. These numbers are derived from the overall
economy, the particular industry¶s sector, or most typically, from the company itself. Figures
such as inflation, joblessness, return on equity (ROE), debt levels, and individual Price to
Earnings (PE) ratios can all play a part in determining the price of a stock. In contrast, technical
analysis depends on historical and time-series data. These strategists believe that market timing
is critical and opportunities can be found through the careful averaging of historical price and
volume movements and comparing them against current prices. Technicians also believe that
there are certain high/low psychological price barriers such as support and resistance levels
where opportunities may exist. They further reason that price movements are not totally random,
however, technical analysis is considered to be more of an art form rather than a science and is
subject to interpretation. Both fundamentalists and technicians have developed certain techniques
to predict prices from financial news articles. In one model that tested trading philosophies;
LeBaron et. al. posited that much can be learned from a simulated stock market with simulated
traders . In their work, simulated traders mimicked human trading activity. Because of their
artificial nature, the decisions made by these simulated traders can be dissected to identify key
nuggets of information that would otherwise be difficult to obtain. The simulated traders were
programmed to follow a rule hierarchy when responding to changes in the market; in this case it
was the introduction of relevant news articles and/or numeric data updates. Each simulated trader
was then varied on the timing between the point of receiving the information and reacting to it.
The results were startling and found that the length of reaction time dictated a preference of
trading philosophy. Simulated traders that acted quickly formed technical strategies, while
traders that possessed a longer waiting period formed fundamental strategies .It is believed that
the technicians capitalized on the time lag by acting on information before the rest of the traders,
which lent this research to support a weak ability to forecast the market for a brief period of time.
In similar research on real stock data and financial news articles, Gidofalvi gathered over 5,000
financial news articles concerning 12 stocks, and identified this brief duration of time to be a
period of twenty minutes before and twenty minutes after a financial news article was released.
Within this period of time, Gidofalvi demonstrated that there exists a weak ability to predict the
direction of a security before the market corrects itself to equilibrium. One reason for the weak
ability to forecast is because financial news articles are typically reprinted throughout the various
news wire services. Gidofalvi posits that a stronger predictive ability may exist in isolating the
first release of an article. Using this twenty minute window of opportunity and an automated
textual news parsing system, the possibility exists to capitalize on stock price movements before
human traders can act.

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Ball and Brown (1968) were the first to highlight the relationship between stock prices and
information disclosed in the financial statements. Empirical research on the value relevance has
its roots in the theoretical framework on equity valuation models. Ohlson(1995) depicted in his
work that the value of a firm can be expressed as a linear function of book value, earnings and
other value relevant information. Amir et al. (1993) were the first to use the term ³value
relevance´ in the context of information content of accounting figures. An accounting
figure/ratio is value relevant is it has the significantly strong predicted association with the stock
prices and stock market indicators such, price-earnings (P/E) or price to book (P/B) ratios.
Misund et al. in their study on the value relevance of accounting figures in the international oil
and gas industry concluded that all accounting figures are value relevant, be it cash or accrual
based. Mingyi Hung (2000) in his paper on ³Accounting Standards and Value Relevance of
Financial Statements

 
.

An International Analysis´ concluded that the use of accrual accounting (versus cash
accounting) negatively affects the value relevance of financial statements in countries with weak
shareholder protection. This negative effect, however, does not exist in countries with strong
shareholder protection. Many studies indicate better value relevance of earnings vis-à-vis cash
flows (for instance, Sloan, 1996; Charitou, 1997; How et al. 2001). Some others, however,
indicate better value relevance of cash flow vis-a- vis earnings (for instance, Cheng et al. 1997;
Clinch et al.2002). At a conceptual level, earnings should be the more representative value driver
because earnings reflect value changes regardless of when the cash flows occur. Still, many
practitioners, are of the view that accruals involve discretion and are often used to manipulate
earnings, and hence they prefer to use cash flow multiples. The concept of cash flow reporting is
a recent one; conventionally companies use to prepare only Balance sheet and Profit & Loss
Account. In India, cash flow reporting was made mandatory for listed companies just six years
back (in 2001-02). Cash flow statement is yet not universally International Research Journal of
Finance and Economics - Issue 17 (2008) 86 understood by the investors. IAS 7 ³Cash Flow
Statement´ came into effect on 1/1/1994. In Germany, cash flow reporting came in to practice in
1998.

 
/

Also much research is done on the relevance of value relevance research in financial accounting
standard setting. Barth, Beaver and Landsman (2000) concluded in their study that the value
relevance literature provides fruitful insights for standard setting process.
Holthousen and Watts (2001) in their study pointed out that value relevance research offers little
or no insight for standard setting. As mentioned before, much of the studies are done on
investigating the relative value relevance of various accounting figures reported in the financial
statements. Brief and Zarowin, in their study on value relevance of dividends, book value and
earnings, pointed out that the variables, book value and dividends, have almost the same
explanatory power as book value and reported earnings. In Liu, Nissim, and Thomas (2002), we
found that multiples based on reported earnings outperform multiples based on a variety of
reported operating cash flow measures. EPS forecasts represented substantially better summary
measures of value than did operating cash flows forecasts in all five countries examined, and this
relative superiority was observed in most industries. Hardly any studies have been done in the
area of investigating value relevance of financial statements based on Indian Accounting
Standards. This may be probably because it¶s just ten years that due to a number of reforms,
Indian economy has divulged into a market-oriented economy. Further, most of the accounting
standards have been developed during last six years by the ICAI. Prior to this, due concerns were
not involved in improving the quality and integrity of financial reporting.

 
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7
Many corporate executives still focus on quarterly earnings figures as a key driver of stock
market values. Although no-one can discount the importance of quarterly earnings numbers or
the impact on the stock market of earnings surprises, they are not the fundamental driver. Stock
market values are driven by real corporate performance, as compared to market benchmarks. The
key relationship is whether the money entrusted to corporate management earns a higher return
than the owners can get elsewhere. Focusing on this key relationship differentiates the value
manager from other managerial styles. Implementing a ³value managerial´ system can be
accomplished by two main metrics: sales, operating margin, turnover metric and a more
traditional return on investment, reinvestment rate metric. Both metrics are simply ways of
expressing the underlying determinants of market value. The most critical decision facing a firm
is whether to adopt a value based managerial system rather than a particular set of decision tools.

 
8

Empirical evidence indicates that accounting information contains useful information about cash
flows and as a consequence influences securities prices (Watts and Zimmerman, 1986). A
number of empirical studies found that market can discern whether a choice of accounting
method has real cash consequences. For instance, market appears to anticipate the impact of
pension liabilities even before they appear on financial statements (Dhaliwal,1986). In addition,
market appears to value research and development expenditures as assets despite the fact that a
firm may decide to present them as expenses in its financial statements (Dukes, 1976; Lev and
Sougiannis, 1996; Aboody and Lev, 1998). The choice between the purchase and the pooling-of-
interests accounting methods for mergers and acquisitions has attracted researchers¶ attention. If
the market were functionally fixated it would react negatively to the amortization of goodwill,
which appears in case a firm adopts the purchase method for mergers and acquisitions. A number
of studies provided evidence, which is not consistent with the hypothesis that the market is
fixated on reported earnings (Hong et al., 1978; Davis, 1990; Rau and Vermaelen, 1998). On the
other hand, some empirical findings are not inconsistent with FFH. Jennings et al. (1996) and
Vincent (1997) find that the price-earnings ratios of the firms that adopted the purchase method
are lower than the corresponding ratios for the firms that employed the pooling-of-interests
method. Andrade (1999) found a positive and statistically significant association between the
stock abnormal return and the change in firms¶ earnings, attributable to the choice of accounting
method for mergers and acquisitions. The magnitude of the association, however, is limited.
Hand (1990) proposed an extended version of FFH, under which the extent to which a market is
functionally fixated is related to the sophistication of investors.When the unsophisticated
investors set the stock prices the market, is likely to be fixated. The probability that the
unsophisticated investors will set the stock prices is conditioned upon the proportion of firm¶s
share capital controlled by unsophisticated investors. Hand (1990) tested the extended functional
fixation with the data on stock returns on the reannouncement date of quarterly earnings, in the
quarters in which a sample of firms adopted a policy of swapping equity-for-debt. Hand (1990)
argues that results of the statistical test are consistent with the extended FFH. Harris and Ohlson
(1987) provided evidence that the stock returns for a sample of firms in the oil and gas industry
are significantly associated with book values. Furthermore, in the same study they showed that
the market could rationally distinguish between the successful effort and the full cost methods of
accounting used by oil and gas companies. In a later study Harris and Ohlson (1990) investigated
whether the observed relationship between book values and market values can be attributed to
the value content of the book values or to functional fixation of investors. Harris and Ohlson
(1990) argue that they did not find evidence that allows them to ascribe the observed relationship
to a functional fixation of investors on book values. They conclude that investors do not appear
to assign substantial importance to book values.

 


It has been suggested that functional fixation results from lack of experience or relevant data. As
a consequence, this fixation should be eliminated as market participants acquire sufficient
experience and data (Gupta and King, 1997; Waller et al., 1999; Chen and Schoderbek, 2000).
Yet, empirical research indicates that the behaviour of market participants, such as financial
analysts, who are supposed to have opportunities to acquire sufficient experience and data, still
exhibits characteristics of functional fixation when predicting securities prices on the basis of
accounting information (Hopkins, 1996; Hirst and Hopkins, 1998; Hopkins et al., 2000). Luft
and Shields (2001) experimentally investigated whether individuals display fixation when they
decide to capitalize or instead to expense intangible expenditures. The findings of the experiment
indicate that the acquisition of additional data and experience does not mitigate fixation on
accounting figures. It should be pointed out, however, that is not necessary for the stock market¶s
price formation process to exhibit functional fixation in order to establish incentives for firms to
select particular accounting policies. It is sufficient for firms¶ managers to believe that securities
prices are affected by reported figures (Beattie et al., 1994). A number of studies have indicated
that managers are not wholly convinced with the regard to the efficiency of capital markets
(Mayer-Sommer, 1979; O¶Keefe and Soloman, 1985). Kothari (2001) argues that although
empirical findings have not offered a convincing indication that market is not efficient, there is a
strong evidence that firms¶ managers behave as if market was fixated to reported earnings. For
instance, the common wisdom regarding the choice between the purchase and the pooling-of-
interests accounting methods for mergers and acquisitions, is that stock market will prefer the
pooling-of-interest method because this method has a positive impact upon reported income and
as result on the prices of the common stock (Kothari, 2001). It appears that the pricing of
acquisitions is affected by the choice between the purchase and the pooling-of-interests methods.
Empirical evidence suggests acquirers pay a premium when the acquisition will be accounted
according the pooling-of-interest method (Nathan, 1988; Robinson and Shane, 1990; Lys and
Vincent, 1995; Ayers et al., 1999). When managers believe that the market is fixated to reported
accounting figures are more likely to engage in earnings management by making the appropriate
accounting policy choices (Beattie et al., 1994). According to Leuz et al. (2003) the extent to
which a firm will engage in earnings management is associated with certain characteristics of the
business environment prevailing in the country in which the particular firm operates. Firms in
countries with developed equity markets, dispersed ownership structures, strong investors rights
and strong legal enforcement are less likely to adopt earningsmanagement policies. A distinct
characteristic of the Greek business environment is the high level of ownership concentration.
Furthermore, the equity market is not particularly developed, while the investor rights and the
legal enforcement is weak (Leuz et al., 2003). Within this context the Greek firms expected to
exhibit high levels of earnings management. Findings of empirical research are consistent with
this prediction. In the study of Leuz et al. (2003) Greek firms appear to achieve the highest
aggregate earnings management score among firms from 31 countries. Bhattacharya et al. (2003)
provide similar evidence, since in their study Greek firms are the most engaged in earnings
management among firms from 34 countries. Koumanakos (2007) provides evidence that Greek
firms engage not only in earnings management but they attempt to manage other accounting
figures as well, e.g. sales turnover. According to the Greek financial and political press,
accounting figures have a dominant influence on the firm¶s stock value. Furthermore, it has been
asserted that it is not uncommon for listed companies to get involved in income management
through the selective application of accounting policies (Zopounidis et al., 2002; Konstantinidis,
2004). The effectiveness of Greek capital market is assessed by the extent to which firms¶ market
value is in accordance with the value of a firm as this can be estimated on the basis of accounting
figures included in firms¶ financial statements. Accounting ratios that include two or more
accounting figures are less susceptible to be target of earnings management. Therefore, it could
be accepted that they provide an objective measure of firm¶s financial position and performance.

 
 

An increasing amount of empirical evidence noticed by several researchers leads to the

conclusion that a range of financial and macroeconomic variables can predict stock market
returns (for a selection of recent studies see e.g. Campbell, 1987, French, Schwert and
Stambaugh, 1987, Fama and French, 1989, Balvers, Cosimano and McDonald, 1990, Been,
Glosten and Jaganathan, 1990, Cochrane, 1991, Campbell and Hamao, 1992, Ferson and Harvey,
1993, Glosten, Jaganathan and Runkie, 1993 and Pesaran and Timmerman, 1995, 2000).
Standard stock valuation models predict that stock prices an affected by the discounted value of
expected cash flows. Chen et al (1986) and Fama (1990) have shown real economic activity,
interest rate and stock returns to be correlated. However, most of these earlier studies focus upon
the short-run relationship between stock market and financial and macro-economic variables,
which may remove important information contained in the permanent component of economic
activity concerning the evolution of short-run movements.
In comparison to the above, long-run relationship between stock market and the economic
variables has received little attention of researchers except in Mukherjee, Naka, (1995), Chung &
Ng (1998), Maysami and Koh (2000) and Nasseh and Strauss (2000). By using the concept of co
integration, first introduced by Eangle and Granger (1987), we can investigate the empirical long
run relationships
Between Stock market indices and both measures of economic activity and financial variables.
Co integration between stock prices and economic activity can be seen to be consistent with both
internal & theoretical consumption and production-based asset pricing models. These models
suggest that stock prices are related to expected future production through effect on the
discounted value of changes in cash flows and dividends (Cochrane).

More recently, empirical models without any specific theoretical structure have been applied in a
more pragmatic fashion to the two-way relationship between stock prices and real economic
variables. The vector auto-regressive (VAR) model has been particularly popular in this area
given that it can be used as a framework for formal examination of inter-relationships within a
given data set without the need to specify a theoretical framework a priori. Once estimated, the
model can be used to simulate the effects of shocks in a way that is consistent with the data by
the use of impulse response functions and forecast-error-variance decomposition. A relatively
early application of the VAR model to the analysis of the relationship between the stock prices
and the macro economy is by Lee (1992) and more recent ones can be found in Cheung and Ng
(1998). While the VAR analysis is useful for the simulation of the effects on the endogenous
variables of shocks to equation error terms, the non-theoretical nature of such models makes the
interpretation of these shocks difficult.
Recently several researchers like Baestaens et. al. (1995), Kaastra Ibeling and others (1996),
Katsurelis (1998), Kamath (1999 and 2002) recommend the use of Artificial Neural Network
(ANN) for investigating the co integrating relationship as well as forecasting in capital markets,
which has tremendous promise in terms of methodology.
There have been several studies on this in Indian context. Sharma Kennedy (1977) and Sharma
(1983) test the weak-form efficiency of the BSE. Both of these studies with the former covering
the 1963-1973 period and the later encompassing the 1973-1971 period, conclude that Indian
stocks generally conformed to random-walk behaviour in that successive period changes were
independent. Poterba & Summers (1988), however, find evidence of mean reversion in Indian
stock prices, suggesting a deviation from random-walk behaviour. Darat & Mukherjee (1987)
apply a vector auto regression model (VAR) along with Akaike¶s final prediction ever on the
Indian data over 1948- 1984 and find that a significant causal relationship (in the sense of
Granger, 1969) exists between stock returns and selected macro-economic variables. Naka,
Mukherjee and Tufte (1996) have analyzed relationship among selected macro-economic
variables and the Indian stock market. By employing a vector error correction model, they find
that domestic inflation and domestic output are the two most prominent factors influencing stock
prices. In a recent study under NSE Research Initiative Kamath (2002, paper no. 10) uses
Artificial Neural Network (ANN) to examine the relationship of macro-economic factors to the
returns of individual assets. The BSE Sensex as well as some individual stock has been
examined. More recent studies like Bhattacharya & Mukherjee (2002), Rao & Rajeswari (2000),
Pethe & Karnik (2000) use advanced methods in econometrics to study the same relationship.
Bhattacharya and Mukherjee (2002) test the causal relationships between the BSE Sensex and
five macroeconomic variables applying the techniques of unit-root tests, cointegration and long-
run Granger non-causality test proposed by Toda and Yamamoto (1995). Their major findings
are that there are no causal linkage between the stock prices and money supply, national income
and interest rate while the index of industrial production leads the stock price and there exists a
two-way causation between stock price and rate of inflation. Rao & Rajeswari (2000) try to
explore the role being played by a good number of macro economic variables in influencing the
stock market when reduced into a manageable number of economic factors. They test the risk-
return relationship for individual scrip for the 1995-2000 period using the traditional CAPM,
three-factor macro economic factor model and the five-factor APT. Pethe and Karnik (2000) use
unit-root, co-integration and error-correction models to test relationship between stock market
behavior and some macro-economic variables.

 
Ä

³Value relevance´ implies ability of the financial information contained in the financial
statements to explain the stock market measures. This study aims at explaining likely impact of
financial reporting by listed companies on the market prices of their shares
In the accounting literature, lots of studies have been done in the area of value relevance of
financial reporting. Different studies have explored the value relevance of various financial data
reported in corporate financial statements (Cheng and Yang, 2003; Sloan, 1996; Hribar and
Collins, 2002).
Researches on value relevance of financial reporting are motivated by the fact that listed
companies use financial statements as one of the major medium of communication with their
equity shareholders and public at large. Further, lot of hard work is done by stock market
regulators and accounting standard setters in improving the quality of financial reporting and
increasing the transparency level in financial reporting. 85 c
 
  
   
      
  c

   In this study, value relevance of Balance sheet,

Income statement and Cash flow statement has been probed with the help of certain key figures
contained in these statements such as, net worth, PAT, cash from operating activities, etc.
further, it has been endeavored to investigate the relative value relevance of information
contained in the Cash Flow Statement vis-à-vis financial information contained in Balance Sheet
and Profit & Loss Account. It may be noted that this study in done in the context of Indian
market. Following previous studies in the field, value relevance implies ability of the financial
information contained in the financial statements to explain the stock market measures.

Article no. 11

Š

&
Stock valuation can be considered as a tool for picking out stocks that will bring you good
returns. Imagine buying a car without knowing its value, or investing thousands of dollars in
property with no potential. Sounds scary? Yet, this is exactly what it amounts to if you put
money into deals without assessing their value.

Intelligent investment needs a lot of effort. If you want to invest in stocks, the first thing to look
out for is its valuation. Valuation of a stock means the price or 'actual' value it holds. If you are
doing stock valuation then you need not study the stock chart every time or worry about the trend
in the market or the interest rates of the stocks. Never invest in stocks without knowing the
value, because that is like going up a blind alley where you have no idea what you will end up
with.

Investment in stocks without valuation is like risking your money deliberately. While the
fluctuations in the stock market cannot be avoided, with the accurate valuation of a stock, you
can minimize the risk factor. It will ensure that you not shoot in the dark, and make sensible
investments. Use the valuation of stocks to serve as a guide for buying and selling stocks.

Instead of pouring your hard earned money into stocks without valuation, it is better to be patient
and carry out a thorough research to determine the worth of stocks before buying. You do not
have to be a math genius, or a stock market guru either. All you need is basic mathematical skill,
and the perseverance to look for all the valuation information available.

You cannot make the most of valuation if you do not understand or appreciate its importance in
the stock market. Spending a large amount in buying shares based on what others say may well
result in losses. Neither should you buy based on media hype, as this may mislead you, and you
may end up losing every penny you invested. Owning stocks of a company in the form of shares
can be a very good wealth-building tool for you as it grants you claim on everything that the
company owns. Hence, assessing the value of the company, the profit it is generating and how
beneficial it can prove to you, is a worthwhile enterprise. Valuation can prove to be especially
beneficial for middle class investors, as they have limited resources to overcome losses incurred
in the stock market.

Therefore, valuation can be considered the key factor in buying stocks. Just as one assesses the
value of anything one buys on the basis of a specified standard, stocks too need to be valued to
determine whether the investment will bring you returns or not. Be aware, there are companies in
the stock market that are making huge profits, but their stocks are of no value. Hence, spending
time on carrying out your own research will help you pick up the right stock for your portfolio.

Article no 12:/
John Walter Russell's

The Stock-Return Predictor results are based on regression analysis of what the historical stock-
return data shows regarding the effect of stock valuation on long-term stock returns, published at
the www.Early-Retirement-Planning-Insights.com web site. Russell's research grew out of The
Great Safe Withdrawal Rate Debate, an ongoing exploration of the stock valuation question that
has generated intense controversy at half a dozen Financial Freedom Community discussion
boards for four years now, beginning with a post put to a Motley Fool board by Rob Bennett on
May 13, 2002. Those discussions also led to development of the Valuation-Informed Indexing
approach to investing, examined in articles posted by Bennett to the www.PassionSaving.com
web site. The new calculator taps into the insights developed during those discussions in an
effort at predicting stock returns.

The default results set forth above show the returns you can expect for stocks purchased at the
stock valuation levels that now apply (the default setting is adjusted monthly). To see how the
value proposition of a stock purchase changes with upward or downward movements in stock
valuation, please move the sliding control button (the ³slider´) to higher or lower S&P price
levels. For example, if you want to see what your expected returns over various time-periods
would be if the price of the S&P 500 were to fall by 20 percent, move the slider to a price level
20 percent below the level that applies for the default results.

Moving the slider to a new S&P price level brings up the results that apply for stocks purchased
at the P/E10 (P/E10 is the price of the index divided by the average of the past 10 years of
earnings--Robert Shiller has long argued in favor of P/E10 as an effective means of assessing
valuations, and Russell's research offers support for Shiller¶s position) level that applies at that
S&P price level. An alternate way of viewing the results that apply for different stock valuation
levels is to directly move the slider to different P/E10 levels.

Article no. 13
The give-and-take that followed Fama/French (1992) represents one of the more interesting
strands of the academic finance literature. Many a graduate student found a dissertation topic
buried in this debate. One of the nice aspects of this area of inquiry was the fact that most of the
important questions could be answered, if the researcher could find the necessary data. The
papers that were written in response to the criticisms of Fama/French (1992) have impacted both
the practice of finance and the theoretical study of financial economics. Seldom has an area of
academic inquiry had so much real-world application.

One of the early responses to the criticisms of Fama/French (1992) was Davis (1994), who
constructed a database of book values for large US industrial firms for the 1940-1963 period, a
period for which the Compustat coverage is either poor or nonexistent. This database was
constructed to be free of survivorship bias, and it covers a period that precedes the period studied
by Fama and French. If the Fama/French results are a result of data mining, this independent
time period should produce different results. A spurious relation in one period is not likely to
carry over to a different period. Also, the beta coefficients in this study were estimated using
annual returns to address one of Kothari, Shanken and Sloan's (1995) main criticisms.

Article no. 14

Dean Baker

The stock market is playing an increasingly central role in the debate over the future of Social
Security. Proponents of privatization have long argued that the returns available from investing
in the stock market would vastly exceed the retirement benefits that workers now get from social
security. More recently, the president has proposed placing a large portion of the social security
trust fund in the stock market, arguing that the difference in returns between stocks and
government bonds (the only assets currently held by the trust fund) would help extend the
solvency of the program.
In both cases, the arguments rest on the assumption that in the future the stock market will
provide significantly higher returns than government bonds will. But is there a reason to believe
that this will be the case? This central assumption has received remarkably little examination. In
general, proponents of investing in the stock market, either individually through private accounts
or collectively through the trust fund, have relied exclusively on past experience. Over the past
seventy years, the real (inflation-adjusted) return in the stock market has averaged approximately
7 percent a year. based on this history, the standard rule has been to assume that the future will
be like the past, and therefore stock returns in the future will also average 7 percent.
This argument has a substantial logical problem. The only reason social security is projected to
have a shortfall is that the trustees are projecting that the future will be very different from the
past. Specifically, they are projecting that the growth rate of the economy and of corporate
profits will average below 1.5 percent annually over the next seventy-five years, less than half
the growth rate of the past seventy-five years. Therefore, in a fundamental way the future will
not be like the past. The question is, can stocks provide the same returns in an economy that is
growing only 1.5 percent a year as they did in an economy growing at a 3 percent annual rate.
Article no. 15
Johnsons & johnsons

Most of us use some form of Johnson & Johnson's products regularly in our daily life. Tylenol,
Band-Aid, Motrin, and Listerine are some of the many trademarked products offered by Johnson
and Johnson (JNJ). As a result of its household practicality and deeply ingrained name
recognition, JNJ has also been a very popular stock holding. Fortunately, for shareholders, it has
performed very well over the last quarter century. In fact, $10,000 invested in Johnson &
Johnson at the beginning of 1975 would have grown to over $391,000 at the end of 2006, not
even including any dividends or spinoffs that may have occurred.

Since 1975, Johnson & Johnson has had 22 years of positive returns and 10 years of negative
returns. The best returning years for JNJ stock were 1991, 1995, and 1985, earning 60%, 56%,
and 46% respectively. Conversely, the worst performing years for JNJ stock were 1983, 1976,
and 1993, with the losses for the year being 18%, 13%, and 12% respectively. The growth of
Johnson & Johnson's stock over the last quarter century has resulted in five stock splits with the
last one being a 2 for 1 split in June of 2001.

Johnson & Johnson is one of the 30 stocks that make up the Dow Jones Industrial Average
(DJIA). However, JNJ's yearly returns are not as closely correlated with the overall DJIA
movements as other stocks in the widely followed index. For example, General Electric (GE),
has moved in the same direction of the Dow Jones nearly 94% of the time since 1975. Johnson &
Johnson, on the other hand, has moved in the same direction as the DJIA a little under 72% of
the time during that same time period. In fact, 9 of the 32 years since 1975, JNJ has moved in the
opposite direction of the overall Dow Jones Industrial Average. Moving forward, I expect
Johnson & Johnson to continue to steadily grow in the future as the usage of its dominant brand
name products continue to grow along with the population. Of course, as always, do your own
due diligence before making any investment decisions.

 
5Äs
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September 2007
Average stock returns are related to firm size and relative price. Firm size is measured by the
market capitalization of equity (price times shares outstanding). When stocks are ranked by size,
small stocks tend to have higher average returns than large stocks. This is known as the size
effect.

Relative price is often measured by a firm's book-to-market ratio (BtM). When stocks are ranked
by relative price, high BtM (or "value") stocks tend to have higher average returns than low BtM
(or "growth") stocks. This is known as the relative-price or value effect.
Many studies document the existence of size and relative-price effects in equity markets in the
US and many other countries. These findings have important implications for equity allocation.
Investors may be able to increase the expected returns of their portfolios by holding small
capitalization stocks and value stocks in greater than market-capitalization proportions. Such
portfolios are said to be "tilted" toward small cap and value stocks.

Portfolio design can matter. A common way to build a tilted portfolio is to combine separate
asset class funds. This building-block approach may generate trading costs that lower net returns.

To help reduce the costs of maintaining tilted portfolios, Dimensional introduced Core Equity
funds. The Core Equity funds are integrated, marketwide portfolios designed to have lower
trading costs than conventional tilted portfolios. Dimensional offers Core Equity portfolios for
the US, international, and emerging markets.

ARTICLE NO. 17

Froot and Dabora (1999)

find that Royal Dutch and Shell Transport have frequently not been priced in line with their
relative claims on cash flows. In the early 1900s, the two companies merged their interests with
an agreement that entitled Royal Dutch and Shell to split the two entities' combined cash flows
on a 60/40 basis. This agreement remained in force until the two firms formally merged in 2005.
In theory, Royal Dutch should have been consistently priced at 60/40 = 1.5 times the value of
Shell Transport. Froot and Dabora (1999) document frequent and sometimes large deviations
from this 60/40 parity relation. This violation of a simple parity relation is sometimes mentioned
as evidence of inefficient prices.

What is the practical value of this information for investors? If the parity relation is violated by a
wide margin, investors could buy the cheap (relative to parity) stock and short the expensive one.
If the pricing discrepancy is big enough to cover the costs of the necessary (round trip) arbitrage
trades, and if the activities of the arbitrageurs force prices back to parity, investors could profit.
Do exploitable errors happen frequently enough²and are they large enough²for investors to
earn abnormal returns?

One way to answer this question is to look at the investment results of professional money
managers. If anyone can identify and exploit pricing errors, it should be the professionals. While
the documentation of pricing irregularities is interesting, it is the performance studies that
address the most practical issue: Can professional money managers use information to earn
superior returns?

Dozens of performance studies have been conducted over the years, with widely varying results.
Much of this variation in results is due to significant differences in methodology and data
quality. To put it bluntly, some of the existing studies just aren't very good. Questionable
methods, coupled with biased datasets, make the results of some studies very misleading. In the
following discussion, I focus on studies that I believe to be of high quality.

ARTICLE NO. 18
Wermers (2000)

finds that mutual funds underperform the CRSP value-weighted market index by 1% per year for
the 1975-1994 period, even though the stocks they own 
 the CRSP index by 1.3% per
year. Why do mutual fund returns lag the returns of their underlying stocks by 2.3%? Wermers
says that 1.6% of this 2.3% difference is due to fund expenses and transactions costs, and the
remainder is due to fund holdings of securities other than common stock. In an effort to
understand why the fund managers' stock picks have higher returns than the CRSP index,
Wermers uses a characteristics-based model and finds that only part of the higher return can be
explained by the characteristics of the stocks (size, book-to-market, and momentum). He says the
part that can't be explained by stock characteristics is due to manager skill.

There may be some value added by the security selection efforts of some managers, but this
added value does not cover the costs generated by the managers. The 1.6% in expenses and
transactions costs mentioned above is larger than any reasonable estimate of value added through
security selection. A regression of net fund returns on the four factors used by Carhart yields an
annual abnormal return of -1.16%. Managers do not cover their costs on a consistent basis.

Some investors argue that small cap stocks are priced in a less efficient manner than large cap
stocks, so that small cap pricing errors can more readily be exploited. This implies that there
should be evidence of positive persistence among the small cap portfolio managers who are the
best at exploiting valuation errors. However, the results of Davis (2001) and Quigley and
Sinquefield (2000) reveal no evidence of reliable positive persistence among small cap
managers. Small cap stocks do not appear to offer greater promise of positive abnormal returns.

The main message of the performance studies seems to be that it is very difficult to consistently
earn positive abnormal returns by gathering and analyzing information. The average mutual fund
underperforms a style-adjusted passive benchmark, and there is very little evidence of
persistence in good performance when returns are adjusted for size and style tilts and simple
momentum effects. Some managers may be more skilled than others, but the payoff to this skill
does not appear to be large enough to cover the costs of active management.

ARTICLE NO 19

Grossman and Stiglitz (1980)

They present an insightful model of how information is reflected in securities prices. Information
is costly to gather and analyze. Recognizing this, investors will only expend resources on
information if they expect the resulting payoff to cover their costs. If the cost of information is
high, it will take a large expected payoff to induce investors to gather and analyze information.
In this model, the degree of informational efficiency of prices depends on the cost of
information. An implication of this model is that investors should cover their costs, on average.
They would collect and analyze information up to the point where the marginal benefit of this
activity equals the marginal cost, but no more. Viewed in the light of this model's predictions, the
evidence that money managers do not cover their costs is a bit of a puzzle. It appears that these
managers engage in more information collecting than they should. They continue to gather
information past the point where the expected marginal payoff equals the marginal cost. These
results suggest that securities markets are actually more efficient than the Grossman and Stiglitz
model would predict.
Society benefits from efficient securities markets, since an efficient market allocates investment
capital to productive uses. The observation that fund managers do not cover their costs suggests
that fund shareholders are subsidizing a public benefit. The activities of managers make markets
more efficient, but the costs of these activities are not fully compensated through higher
investment returns. Society is better off, but fund shareholders are paying the bill for this benefit.
This appears to be an unintended benevolence.

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Ä5V To study the impact of various financial ratios on the stock returns.

'5V To find out the key drivers that affects the stock market.

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This study provides insights regarding the extent that policies concerning operating, investment
and working capital management affect stock returns. The findings of this study can be helpful to
managers for selecting and implementing the appropriate business policies. Besides, current
 shareholders and investors may find the results of this study useful in identifying the drivers of
stock values.
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Ä5V We have not considered other macro economic factors that can affect stock returns.
'5V We have considered only key financial ratios that are we have ignored other ratios in our
ratios
(5V We have considered the ratios of companies listed in NSE for the year 2009 only.
.5V Another limitation is that NSE keep changing the listed companies on the basis of their
capitalization.

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not.
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±V There is a positive relation between the financial ratios and its stock prices and the stock market.




 
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The research carried out in this study is descriptive in nature. Descriptive research includes
surveys and fact-finding enquiries of different kinds. The major purpose of descriptive research
is description of state of affairs as it exists at present. The main characteristic of this method is
that researcher has no control over the variables; he can only report what has happened or what is
happening.

The research type is Empirical in nature, that is, that research which derives its data by means of
direct observation or experiment, such research is used to answer a question or test a hypothesis .
The results are based upon actual evidence as opposed to theory.


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This data is collected from materials NSE, annual reports, journals, CAPITALINE,
MONEY.REDIFF.COM.

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+ b8 RONW


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°V The significance level mentioned in the table indicates the possibility of error in
our research.

°V The t-value(t-test) shows whether there is a relation between the dependent and
independent variables at a given significance level.

°V Here we will compare the values of t and significance level, if the value of ³t
>=significance value´ then there is significant relationship and if ³t less than the
significance value´ then there is no relation.

°V The standardized coefficient (beta) and the unstandardized coefficient (b + std

error) shows the direction of movement with respect to each other.

After analyzing the table, we have got the ratio which impact the stock return and these
are:
1. Earnings per share ratio(EPS)
 2. Debt Equity ratio
3. Interest coverage ratio
4. Return on net worth(RONW)

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1.V Ratios like EPS, D-E ratio, interest coverage ratio, RONW affect the stock returns.
2.V This study finds that the operating performance of a company, its growth opportunities
and its capability to generate profits from its sales affect stock returns.



"
 
1.V Investors should also use the macro economic factors before investing in the stocks.
Factors like growth rate, GDP, interest rate should be considered.
2.V Size factor should be also considered before investing in a particular company.
3.V The importance of other ratios should not be ignored
4.V We should also consider various information¶s (news) related to the company before we
invest in that company.

" 

This paper attempted to investigate the association between stock returns and certain accounting-
numbers based variables for Indian listed firms in the period 2009-2010(NSE).The results
indicates that the disclosure that concerns the operating performance of a company, its growth
opportunities and capability to generate profits from its sales affect stock returns. It seems,
therefore, that market participants (shareholders, investors, analysts, etc.) take into consideration
accounting data when they value firms¶ stock. It should be noted, however, that the impact of
this disclosure is not always the expected one


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°V   4654Š &, ³Penelitian tentang Informasi Laba dan Dividen Kas yang
dibawa oleh Pengumuman Saham,´  

 

 Vol. 2, No. 1. (April
2000). pp.1 -12.
°V :"  4%54%53
&4;5%
!", ³´Earnings and Stock Splits´, 
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Vol. 64, No. 3. (July 1989).
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, McGrawHill. (2005).
°V v #*4
5Š54³The Empirical Relationship between Trading Volume, Returns and
Volatility,´ 
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°V $!)
4Š 54#*Š5$4Š 64³Trading Volume and Serial
Correlations in Stock Returns,´ #
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Vol. 108, No. 4.
(Nov., 1993). pp. 905-939.
°V !
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$5, ³Liquidity Changes Following Stock Splits,´   
   Vol. 34, No. 1. (March 1979). pp. 115-141.

°V   $, ! % &'!( ! Lembaga Penerbit Fakultas Ekonomi

Universitas Indonesia. (1999).
°V 

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41 54v
*"±5 5- 4=The Empirical Relationship
between Stock Returns, Return Volatility and Trading Volume in the Brazilian Stock
Market,´  )*(2005).!"4c2* , ³Pengertian dan Dimensi Likuiditas Aset
Finansial,´ (

'+. (2004). pp. 27.
°V *
46
. ³Applied Econometric Time Series,´  
 Wiley Series. (2004).
pp. 76.
°V ±$45, ³Efficient Capital Markets: A Review of Theory and Empirical Work,´ 
    25, no.2. (May 1970). pp. 383-417.
°V ±$4545± 
45Š

4*5, ³The Adjustment of Stock Prices to New
Information,´ c
 
   "= 10. (February 1969).
°V  )4545" 45
$, ³The Valuation of Stock Splits and Stock
Dividends,´     
13. (December 1984).