Investigating the Effect of Market Efficiency on the Relationship between the Rate of Return and the Future Profitability of Firms

Abstract

Future Earnings are an important factor in stock price valuation models. In other words, in the conditions of market efficiency, the prices will correctly represent the future financial performance of the Firm and these Stock prices will be consistent with the intrinsic value of the Firm's shares. The importance of this research is to show the role of market efficiency as a variable in the relationship between the rate of return and the future profitability of the Firm. The purpose of this research is to determine the effect of market efficiency on the relationship between the rate of return and future profitability in companies listed on the Tehran Stock Exchange. In order to achieve the goal of the research, 94 Firms from among the Firms listed in the Tehran Stock Exchange during the years 2013 to 2022 were considered by the systematic elimination sampling method to perform the analysis. Regression method was used to test research hypotheses. Also, in order to evaluate the effect of market efficiency on the relationship between the rate of return and Earnings in measuring the variable of market efficiency, instead of using each of the measurement indicators alone, using the method of principal components analysis, a composite index is created that includes different dimensions of market efficiency. The results of the research show that there is a positive relationship between stock returns and the ability to predict the profitability of Firms. But market efficiency has not been able to improve the relationship between Firm value and future profitability, and also market efficiency has not strengthened the relationship between future profitability and stock return rate.

Keywords

• market efficiency
• rate of return
• future profitability of firms