Predicting the Future Stock Return by Emphasizing on Life Cycle Based on Cash Flow Statement

Abstract

The main purpose of this research is to investigate the future stock return considering the features of different stages of the life cycle based on the cash flow statement. In this research the stock return has been considered as dependent variable, Earning per share and the change in earnings as independent variables, and risk factors (the book value of equity to the market value of equity ratio, loss, firm size, market model beta) have been considered as control variables. Firstly, the statistical sample has been separated using cash flow pattern to the firms at the stage of the Introduction, Growth, Mature, Shake-Out and Decline, then in order to analyze the raw data and converting them to the information needed for making decision about hypotheses and explaining the relationships among the variables, the regression testing is used. The results obtained from the investigation of 1,123 firms-years during the period between 2002 and 2011 indicate that generally the change in earnings per share has significant and positive effects on predicting the future stock return. But the effect of the earning per share on future stock return is insignificant and positive. In addition, the results of the test show that the lowest of the book value to market value ratio in mature stage has a positive effect on future stock return and the highest ratio in this stage has a negative effect on future stock return.