Impact of Total Asset Turnover Ratios on Equity Returns: Dynamic Panel Data Analyses
Abstract
This paper is an empirical exploration of the impact of total asset turnover ratios on stock returns of 1961 US public firms in different types of industries from 2001 to 2015. Stock prices are significantly influenced by operating performance of a company in efficiently utilizing its assets. For that matter, operating efficiency (as measured by total asset turnover ratio) plays a role in portfolio investment decisions. Pedroni’s heterogeneous panel co-integration procedures, associated bivariate error-correction model (ECM), dynamic ordinary least squares (DOLS) and generalized method of moments (GMM) are applied. Both stock returns and total asset turnover ratios in levels are nonstationary with I (1) behavior. Subsequently, both variables are found cointegrated. The panel ECM estimates suggest convergence of variables toward long-run equilibrium at moderate pace with short-run interactive positive feedback effects. Again, both DOLS and GMM estimates reveal short-run contemporaneous positive effects of total asset turnover ratios on stock returns in levels. In view of the findings of this study, firms should strive to improve operating efficiency, among others, to enhance competitiveness and thereby to boost their stock prices for rewarding shareholders.
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References
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Novy-Marx, R. (2013). The other side of value: The gross profitability premium. Journal of Financial Economics, 108(1), 1-28.
Okwo, I. M., Okelue, U. D., & Nweze, A. U. (2012). Investment in fixed assets and firm profitability: Evidence from the Nigerian brewery industry. European Journal of Business & Management, 4(20), 10-17.
Pedroni, P. (2000). Fully modified OLS for heterogeneous cointegrated panels. Advanced in Econometrics, 15, 93-130.
Pedroni, P. (2001). Purchasing power parity tests in cointegrated panels. Review of Economics & Statistics, 83(4), 727-731.
Phillips, P. C. B., & Hansen, B. E. (1990, January). Statistical inference in instrumental variables regression with I (1) processes. The Review of Economic Studies, 57(1), 99125.
Reyhani, A. G. (2012). The investigation of effect of assets structure on performance of accepted companies of Tehran Stock Exchange (TSE). Journal of Basic & Applied Scientific Research, 2(2), 1086-1090.
Stock, J. H., & Watson, M. W. (1993, July). A simple estimator of cointegrating vectors in higher order integrated systems. Econometrica, 61(4), 783-820.
Xu, Z. S., & Xu, N. Z. (2013, September 15). Research on the optimal allocation of assets structure and corporation management performance: A case study of China Textile Machinery Co., Ltd. Asian Journal of Business Management, 5(4), 332338.
Akaike, H. (1969). Fitting autoregressive for prediction. Annuls of the Institute of Statistical Mathematics, 21(1), 243-247.
Ang, J. S., Cole, R. A., & Lin, W. J. (2000, February). Agency cost and ownership structure. Journal of Finance, 55(1), 81-106.
Arellano, M., & Bond, S. (1991, April). Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. The Review of Economic Studies, 58(2), 277-297.
Azadi, M. (2013). The relationship between changes in asset structure and operating earnings in the Tehran Stock Exchange (TSE). Trends in Advanced Science & Engineering (TASE), 7(1), 30-34.
Baker, H. K., & Powell, G. E. (2005). Understating financial management: A practical guide.
Blackwell Publishing: United Kingdom. Belanova, K., (2016, April). The impact of national environment of a company on its financial policy. International Journal of Management Science & Business Administration, 2(5), 32-37.
Blundell, R. & Bond, S. (1998). Initial conditions and moment restrictions in dynamic panel data models. Journal of Econometrics, 87(1), 115-143.
Breitung, J. (2000). The local power of some unit root tests for panel data. Advances in Econometrics, 15, 161-177.
Campello, M., & Giambona, E. (2010). Asset tangibility and capital structure. Retrieved March 18, 2019 from http://www.eds.edu/fileadmin/redakteur/ funkt.dept.../1003232_Giambona.pdf
Dhillon, A. S., & Vachhrajani, H. (2012). Impact of operational efficiency on overall profitabilityA case study of GIPCL. Retrieved March 20, 2019 from http://zmrita.edu/asb/pdfs/wrokingpaper
Dong, Y. l., Charles, K. Y., & Cai, D. (2012). What drives fixed asset holding and riskadjusted performance of corporates in China? An empirical analysis. International Real Estate Review, 15(2), 141-164.
Ellis, R. (1998). Asset utilization: A metric for focusing Reliability Efforts (7th ed.) Marriott Houston Westside: Gulf Publishing Company.
Engle, R. F., & Granger, C. W. J. (1987, March). Co-integration and error correction: representation, estimation and testing. Econometrica, 55(2), 251-276.
Esplin, A. M., Hewitt, M. P., & Yohn, T. (2014). Disaggregating operating and financial activities: Implications for forecasts of profitability. Review of Accounting Studies, 19(1), 328-362.
Fairfield, P. M. & Yohn, T. (2001). Using asset turnover and profit margin to forecast changes in profitability. Review of Accounting Studies, 6(4), 371-385.
Fleming, G. A., Heaney, R. A., & McCosker, R. (2005). Agency cost and ownership structure in Australia. Pacific-Basin Finance Journal, 13(1), 29-52.
Gujarati, D. N. (2003). Basic economics (4th ed.). McGraw-Hill, New York.
Hansen, L. P. (1982). Large sample properties of generalized method of moments estimators. Econometrica (Journal of The Econometric Society), 50(4), 1029-1054.
Im, K. S., Pesaran, M. H., & Shin, Y. (2003). Testing for unit roots in heterogeneous panels. Journal of Econometrics, 115, 53-74.
Iqbal, A., & Mati, M. (2012). Relationship between non-current assets and firms profitability. Retrieved March 20, 2019 from http://mpra.ub.uni-muenchen.de/44132/MPRA
Ishmael, O., & Kehinde, J. S. (2013). Profitability analysis trend of components of current assets and their prospects in Ajaokuta iron industry. Canadian Journal of Accounting & Finance, 1(2), 28-37.
Iskandar, T. M., Bukit, R. B., & Sanusi, Z. M. (2012). The moderating effect of ownership structure on the relationship between free cash flow and asset utilization. Asian Academy of Management Journal of Accounting & Finance, 8(1), 6989.
Jamali, A. H., & Asadi, A. (2012). Management efficiency and profitability in Indian automobile industry: From theory to practice. Indian Journal of Science & Technology, 5(5), 2779-2781.
Jose, M. L., Lancaster, C., & Stevens, J. L. (2011). Stability of excellence: Revealed patterns in Tobin’s Q-ratios. Journal of Applied Business Research, 12(2), 83-91.
Kantudu, A. S. (2008, March 24). Effect of profitability and total assets on the funded status of pension assets of quoted firms in Nigeria (pp. 1-22). Retrieved from http://ssrn.com/=1104845
Kotsina, S., & Hazak, A. (2012). Does investment intensity impact company profitability? A crosscountry empirical study. Proceedings from the 2nd International Conference of Economics, Trade and Development IPEDR, 36, IACSIT Press, Singapore.
Levin, A., Lin, C. F., & Chu, C. (2002). Unit root tests in panel data: Asymptotic and finite sample properties. Journal of Econometrics, 108, 1-24.
Li, D. (2004, January). The implications of capital investments for future profitability and stock returns-an overinvestment perspective (pp. 1-55). Retrieved March 20, 2019 from http://bschool.nus.edu/departments/FinanceandAccounting/Donglinli
Nissim, D., & Penman, S. H. (2001). Ratio analysis and equity valuation: From research to practice. Review of Accounting Studies, 6(1), 109-154.
Novy-Marx, R. (2013). The other side of value: The gross profitability premium. Journal of Financial Economics, 108(1), 1-28.
Okwo, I. M., Okelue, U. D., & Nweze, A. U. (2012). Investment in fixed assets and firm profitability: Evidence from the Nigerian brewery industry. European Journal of Business & Management, 4(20), 10-17.
Pedroni, P. (2000). Fully modified OLS for heterogeneous cointegrated panels. Advanced in Econometrics, 15, 93-130.
Pedroni, P. (2001). Purchasing power parity tests in cointegrated panels. Review of Economics & Statistics, 83(4), 727-731.
Phillips, P. C. B., & Hansen, B. E. (1990, January). Statistical inference in instrumental variables regression with I (1) processes. The Review of Economic Studies, 57(1), 99125.
Reyhani, A. G. (2012). The investigation of effect of assets structure on performance of accepted companies of Tehran Stock Exchange (TSE). Journal of Basic & Applied Scientific Research, 2(2), 1086-1090.
Stock, J. H., & Watson, M. W. (1993, July). A simple estimator of cointegrating vectors in higher order integrated systems. Econometrica, 61(4), 783-820.
Xu, Z. S., & Xu, N. Z. (2013, September 15). Research on the optimal allocation of assets structure and corporation management performance: A case study of China Textile Machinery Co., Ltd. Asian Journal of Business Management, 5(4), 332338.
Published
2020-05-01
How to Cite
PATIN, Jeanne-Claire; RAHMAN, Matiur; MUSTAFA, Muhammad.
Impact of Total Asset Turnover Ratios on Equity Returns: Dynamic Panel Data Analyses.
Journal of Accounting, Business and Management (JABM), [S.l.], v. 27, n. 1, p. 19-29, may 2020.
ISSN 2622-2167.
Available at: <https://journal.stie-mce.ac.id/index.php/jabminternational/article/view/559>. Date accessed: 27 apr. 2024.
doi: https://doi.org/10.31966/jabminternational.v27i1.559.
Section
Articles
