The Effect of Financial Ratio on Stock Prices from Malaysian Banking System
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Universiti Malaysia Sarawak (UNIMAS)
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This study investigates how selected financial ratios influence stock prices in the Malaysian banking sector between 2018 and 2023. By concentrating on Return on Equity (ROE), Debt-to-Equity ratio (D/E), Price-to-Earnings ratio (P/E), Earnings per Share (EPS), and Price-to-Book ratio (P/B), the analysis draws on panel data from fifteen commercial banks and applies three techniques – Pooled OLS, Fixed Effects Model, and Random Effects Model. The results indicate that ROE, P/E, EPS, and P/B correlate positively with stock prices, whereas D/E exerts a negative impact of similar statistical significance. The Hausman test identifies the Fixed Effects Model as the most appropriate specification for this dataset. These empirical patterns lend support to Signalling Theory and the Efficient Market Hypothesis, reinforcing the idea that financial ratios convey useful information to market participants. Practical recommendations for investors, regulators, and bank managers emerge from the findings, although the authors acknowledge constraints linked to the limited time frame and the exclusion of macroeconomic variables. To deepen understanding of stock-price dynamics in developing markets, future research should integrate external economic indicators and qualitative insights alongside financial metrics.