Modelling stock price behaviour by financial ratios

The main purpose of this study is to find out which economic dimensions of the firm are reflected in stock price behaviour in the Finnish stock market. Based on the previous theoretical articles, four economic dimensions are chosen: profitability, financial leverage, operating leverage and corporate growth. Twelve (12) financial ratios are then selected to represent these four dimensions. All the Finnish firms common series listed for the whole 1974–1986 period are included in the empirical analysis.All of the four expected dimensions above are found in the empirical classification pattern of ratios. On the cross-sectional level, profitability and financial leverate are reported as determinants of stock price behaviour. Corporation growth is merely connected to the risk of the common stock. Somewhat weaker results concerning the association between stock price behaviour and operating leverage factor may be due to difficulties measuring operating leverage on an empirical level.When studying the intra-year explanatory power of financial ratios, it is reported that the explanatory power of financial ratios tends to increase when the reporting day approaches, and starts to decrease after that releasing day of financial statement numbers. Empirical evidence strongly indicates that financial ratios represent pricing relationships in a substantive manner.The financial support by the Academy of Finland as well as the helpful comments and suggestions of an anonymous referee are gratefully acknowledged.