The effect of money supply on financial ratios and stock return in Malaysia

Abstract

This thesis examines the effect of two macroeconomic variables as moderators on the relationship between three financial ratios and stock return in the Kuala Lumpur Stock Exchange (KLSE). The macroeconomic variables in this study are interest rate (INT) and money supply (MS) and the financial ratios are debt-to-equity ratio (DE), dividend per share (DPS) and quick ratio (QR). Firm size and book-to-market value are considered as controlling variables and further analyses have been done to avoid methodological problems. This study examines the impact of the selected financial ratios on stock return and investigates the moderating effect of INT and MS on the relationship between the financial ratios and stock return. The data was obtained from 300 companies that were listed in KLSE from year 2003 to 2012. Least square regression with robust standard errors, generalized least squares regression (GLS) and fixed effect regression were used to analyse the data in order to control for non-normality and heteroscedasticity. The findings suggest that an increase in value of a firm’s debt relative to its equity would cause a decrease in the firm’s stock return in the following year. The results also indicate that firms with higher QR and DPS are likely to have a higher stock return in the subsequent year. Moreover, the findings show a negative relationship between INT and stock return, but there is no evidence that shows significant impact for MS on stock return. The findings of this study further show that INT moderates the relationship between DE and stock return but suggest no evidence of moderating the relationships between QR, DPS and stock return. However, based on the findings, MS moderates the relationships between DE, QR and stock return, but does not moderate the effect of DPS on stock return. Nevertheless, both INT and MS -the selected macroeconomic variables- have a moderating effect on the relationship between all selected predictors and stock return. The findings of this study would be of interest to domestic and international investors, stockbrokers, board of directors, financial managers and policy makers.