The use of multiple accounting variables in predicting stock returns

Research to date documents that the book-to-market value ratio of common shareholders\u27 equity, the earnings-to-price ratio, and the cash flow-to-price ratio are related to the cross-section of future stock returns. Our study explores the more efficient prediction model for future stock returns using the book value of equity, accounting earnings and cash flow as a set. Given the level of the above three accounting variables, our model based on the ratio of the firm\u27s market value of equity to the cross-sectional average market value of all firms in the market performs better in predicting future stock returns than any of the traditional ratios. However, the use of other major components of financial statements does not improve the prediction of future stock returns, implying that those three accounting variables would be sufficient in predicting future stock returns