Examining the influence of accounting ratios on Maltese share prices and forecasting future prices using time-series models

Abstract

PURPOSE: This research study aims to investigate the relationship between various categories of accounting ratios and the share prices of Maltese listed companies, also giving particular attention to different industries, and subsequently attempt to predict the future share prices of such entities based on the established relationships. DESIGN: A mixed methodology was adopted to carry out this study. The quantitative analysis makes use of basic statistical analyses, time-series multiple regression models and forecasting tools, whilst the qualitative aspect gathered valuable insights from experts in the local financial markets through seven semi-structured interviews. FINDINGS: The presence of this relationship was identified, although being weak due to the existing local challenges. Different significant categories emerged from the regressions and the interview responses, hence determining the most important ratios was rendered a complex task. On another note, performing industry-specific analyses emerged to have a stronger explanatory power as well as being considered more useful by interview respondents. Lastly, predicting future share prices solely using accounting ratios was deemed inaccurate, as numerous factors must be considered when evaluating an investment decision. However, using projected accounting ratios to forecast a range of anticipated future prices to allow for a margin of safety was concluded to be a more prudent and reliable approach. CONCLUSIONS: Considering numerous accounting ratios whilst placing greater weighting on those which are more essential for the concerned industry provide strong indications of good investments. However, this must be combined with the acknowledgement of qualitative and external factors to make optimal investment decisions. Accounting for the unique dynamics of the local stock market is also essential to ensure satisfactory returns. VALUE: This study was intended to contribute to the literature relating to the Maltese stock market as well as providing valuable insights mainly to investors as well as the management of listed companies to make better investment and operational decisions respectively. It also provides policy makers with possible solutions to improve the situation of the local stock exchange and the financial markets in general.