The value relevance of financial statements and its predictability on stock returns: an empirical study of Taiwanese market

This thesis investigates the predictive power of financial ratios on stock returns within the Taiwanese equity market, challenging traditional views on market efficiency. The primary aim is to assess whether financial statement information can predict stock returns in Taiwan, providing new insights into the semi-strong form of the Efficient Market Hypothesis (EMH). Utilizing a robust methodological framework, the study employs panel unit root tests and dynamic panel data regression analyses to explore the interactions between various financial indicators and their impact on stock performance. The research adopts a dynamic panel data approach, analyzing data from the FTSE TWSE Taiwan 50 Index from 2015 to 2023. This includes rigorous tests for stationarity and the application of the Generalized Method of Moments (GMM) to address potential endogeneity issues. Findings reveal that financial ratios such as the price-to-earnings (PER) and price-to-book value (PBV) ratios significantly influence stock evaluations. The study highlights mean reversion tendencies in stock returns and identifies the substantial impacts of specific financial ratios across varying market conditions. The research validates an investment strategy based on predictive modeling, favoring high-potential stocks. This strategy significantly outperforms traditional market approaches, particularly through the construction of winner and loser portfolios based on the model's forecasts. By demonstrating that financial statement analysis can provide a competitive edge in stock market investments, this study suggests a more nuanced understanding of market efficiency. It also offers practical frameworks for investors aiming to enhance their portfolio returns through data-driven strategies. This thesis not only advances academic knowledge in financial analytics but also provides concrete strategies for investment practices in the Taiwanese market, challenging established norms and highlighting the importance of timely financial disclosures in investment decision-making.