In this era of globalized business analysis, researchers, practitioners and academicians are putting all their efforts to predict the future trends of stock markets. If some are doing it to beat market returns, some others are doing it for increasing their business of brokerage. In the process, stock market participants are using a variety of tools. One such tool is Multivariate Regression Analysis (MRA), which allows probing and understanding the determinants of any response variables. In the paper titled, “Multivariate Regression: A Tool for Forecasting Stock Prices”, the authors, R W Rebello and Y V Reddy, apply MRA on BSE ‘Group A’ shares to test the ability to forecast. The authors observe that it is possible to predict stock prices reasonably well and also discover the growth rate of a particular industry based on the resultant data, using MRA. A small investor may decide when to enter or exit a particular firm and/or sector. The authors conclude that the multivariate regression model is a useful device to foresee stock prices with reasonable correctness. They also caution that in running the model the investors should properly identify variables encompassing a direct impact on the stock price, while the frequency of data available ought to be borne in mind.

In another paper titled, “Accounting Numbers as a Predictor of Stock Returns: A Case Study of NSE Nifty”, the author, Simranjeet Sandhar, makes an attempt to understand the association between financial strength of a company and stock market income. The author throws light on the association between the financial ratios on the basis of liquidity, earning potential, leverage, and dividend payout, and in the process, use the ratios approximating book value, current ratio, quick ratio, dividend per share, dividend payout ratio, earnings per share, leverage, gross profit margin, etc. Both stakeholders and shareholders are quite keen on the pricing of a share and the impact of financial reports on the stock market is one such issue everyone is waiting to understand. The author finds that the ratios are not the greatest predictors to choose a company for investment. Extraneous factors like government policies, availability of labor, research and development, foresight for the industry, etc., also influence the movement of stock price. However, the author also observes that profitability ratios may be used to derive a basic direction as to invest or not in a stock, as these ratios have better relationship to stock returns than that of other ratios.

While investors are searching and worrying about deciding on whether to invest or not, companies are working to improve their ability to compete and increase shareholders’ wealth using Mergers and Acquisitions (M&A). Questions as to whether shareholders’ wealth is increased or diminished through M&A of companies in the process of gaining higher market share, for expansion of portfolios to reduce business risk, for entering new markets and geographies, or to capitalize on economies of scale, etc., are to be studied and understood. The paper titled, “Effects of Multinational Mergers and Acquisitions on Shareholders’ Wealth and Corporate Performance”, by Anita Shukla and Mouni Geoffrey Gekara, makes an attempt in this direction. The authors examine the impact of merger on the operating performance of the acquiring firm by examining pre- and post-merger financial ratios, namely Net Operating Profit After Tax (NOPAT), Return on Assets (ROA), Return on Capital Employed (ROCE), Earning Per Share (EPS), and Economic Value Added (EVA). The authors observe that Tata Steel’s merger with Corus Steel did not enhance shareholders’ value particularly after the merger. The authors also observe that this merger is not positive in net present value activities for acquiring firms and that the merger program was not consistent with the value-enhancing activity of the management. Perhaps it is too early to establish the performance post merger.

All businesses should prepare financial statements to update the shareholders and stakeholders of the company about the performance and status of the company in order to make an informed decision. The paper, “The Relationship Between Fair Values in Banks’ Trading Books and Volatility in Share Price Returns in the Indian Context”, by Tanupa Chakraborty, attempts to examine whether the shift from historical cost to fair value accounting for Indian banks’ trading books will affect the returns on the banks’ stocks or bank index. The author observes that with the beginning of fair value accounting in the banks’ trading books, there is no noteworthy impact on the instability of banks’ stock returns; this is also consistent with the previous research studies. The investors could be in the habit of basing their investment decisions on fair valuation, and have hence not moved as such by the additional volatility in the values of banks’ investment portfolio induced by fair value accounting.

Further to accounting numbers and their ability to predict stock market returns, prepared on the basis of financial statements certified by the auditors, the paper titled, “An Analysis of the Explanatory Paragraphs of Auditors’ Going-Concern Reports and Footnotes of Bankrupt Companies Under SAS No. 59”, by Michael Maingot and Daniel Zeghal, analyzes the explanatory paragraphs in the auditors’ report and the footnotes to the financial statements of the bankrupt companies as mandated by SAS No. 59. The authors ascertain whether auditors take a more active and rigorous approach when they issue Going-Concern (GC) audit opinions, paying strict attention to the SAS No. 59, or not. The authors also present the GC conditions and events that were identified under the four categories, i.e., negative trends, other financial difficulty indicators, internal matters, and external matters, as suggested by SAS No. 59. They observe that the auditors are following the guidelines of SAS No. 59 intimately while issuing a GC opinion.

-- Vunyale Narender
Consulting Editor