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Stock market trading strategies based on earnings and cash flows in Finland: alternative risk-adjusting approach

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  • Kallunki, Juha-Pekka

Abstract

This paper investigates whether the predictability of risk-adjusted stock returns using the ratio of earnings to stock price and the ratio of cash flow earnings to stock price disappears, when accounting-based risk measures are used for risk-adjusting purposes. The main contribution of the paper is to extend the approach suggested by Chan and Chen (1991) to other trading strategies and accounting-based risk measures. Consistent with the hypothesis developed, the empirical results indicate that earnings-to-price ratios lose their ability to predict stock returns when a firm's financial and business risks are used to measure the risk of its stock. The results also indicate that these accounting-based risk measures can weaken but not totally negate the ability of the cash-flow earnings to stock price ratio to predict risk-adjusted stock returns.

Suggested Citation

  • Kallunki, Juha-Pekka, 2000. "Stock market trading strategies based on earnings and cash flows in Finland: alternative risk-adjusting approach," Scandinavian Journal of Management, Elsevier, vol. 16(1), pages 85-99, March.
    • Handle: RePEc:eee:scaman:v:16:y:2000:i:1:p:85-99
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