Only big stocks respond significantly to earnings and earnings growth of portfolio or factor portfolios: Study
According to a study titled "An Empirical Testing of Relationship between Earnings and Portfolio Returns in Indian Capital Market" published in the recently released latest issue of Finance India - Quarterly Journal of Finance published by Indian Institute of Finance, Vol. XXX No. 4, December 2016, specific relation cannot be established between returns and earnings, it can be fairly stated that only big stocks respond significantly to earnings and earnings growth of portfolio or factor portfolios.
Authored by Prof. T. Manjunatha,
Professor and Chairman, Visvesvaraya Technological University, the Department
of MBA, University BDT College of Engineering, Karnataka, the study attempts to
test whether earnings and earnings growth explain the portfolio returns.
Author has used National Stock Exchange
continuously traded stocks and other relevant data from July 1996 to June 2010. He has formed six
portfolios based on intersection of size and value which are regressed over the
earnings and earnings growth specific to the portfolios and also over the
earnings and earnings growth of the three factor portfolios-market, size and
Projected and current year
guideline in earnings of big stocks portfolio has significant influence on
their returns. Therefore past growth in earnings and current / next year
guidelines in earnings explain the returns of big stocks only. Returns of small
stocks do not respond to earnings and growth in earnings of previous or current
or next year.
Investment in stocks and portfolios is based
on returns and risks associated with many factors. The earnings and earnings
growth can be taken as guidelines for returns of portfolios of big stocks.
Earnings and earnings growth do not explain the returns of portfolios of small
stocks and hence a different factor of risk needs to be taken for these.
The empirical findings of this paper would
be useful to financial analysts as the earnings and earnings growth can be
taken as guidelines for returns of portfolios of big stocks.