Equity Valuation Multiples and Stock Returns: Evidence from Malaysian Listed Firms

Valuation of equity has been an important integral aspect of investment decision. Investment analyst value stocks for investors who wish to buy or sell their stocks. One of the ways of valuing equity is through the use of Equity Valuation Multiples (EVMs). In spite the practical application of valuation multiples by investment analysts not much empirical work is conducted on the use of these multiples to predict stock returns. This research investigated the influence of equity valuation multiples on stock returns of firms in Malaysia. The study used data from 233 randomly selected listed firms in Malaysia. The study covered the period of 2008 to 2013. The result reveals a significant positive relationship between price-earnings, price-book value, price-sales, price-cash flow valuation multiples and the stock returns. The implication of positive relationship between the explained and the four explanatory variables implies that the P/E, P/B, P/S, and P/C multiples are significantly and positively related to stock returns. The low R-2 implied that, stock returns are not only explained by EVMs but by combination of several variables.