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Predicting DJIA Returns Using Income Statement Insights

This research investigates how financial metrics from the income statement of DJIA constituents can predict stock returns. By analyzing quarterly data from Q1 1979 to Q4 1999, we model DJIA returns through key variables: Dividend Yield, Earnings, and EBITDA Yield. Our regression analysis reveals that while dividend metrics traditionally hold predictive power, EBITDA Yield is equally effective, underscoring its reliability in comparison to dividend metrics. Our conclusions highlight the importance of EBITDA Yield and suggest avenues for further research in stock return prediction.

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Predicting DJIA Returns Using Income Statement Insights

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  1. Predicting the DJIA:Going up the Income Statement BSD: Roberto Alatorre Prakash Arya Brian Chin Philipp Schmahl John Withrow

  2. Agenda • Data Collection • Data Organization • Results • Conclusions

  3. Data Collection • Collected data on the 30 companies that make up the DJIA • Quarterly Data • Q1 1979 through Q4 1999 • DJIA composition changes in: - Q2 1979 - Q4 1985 - Q1 1991 - Q2 1997 - Q4 1998 - Q4 1999

  4. Data Organization • Income Statement data on a per share basis: • EBITDA Yield for DJIA • Dividend Yield for DJIA • Earnings for DJIA • Divisor Calculation • ( Share Prices) / (Actual DJIA) • Base case and adjusting for stock splits, etc. • Modeling the DJIA

  5. BSD-DJIA vs. DJIA:

  6. Hypothesis The further you go up the Income Statement, the better the variables will be to predict the returns for the DJIA Rationale: • Dividends are at managers discretion • EBITDA is hard to manipulate

  7. Regression Results: Dividend Model: DJIAreturns = - 0.054 - 5.016*CrSprdLag + 2.273*TrmSprdLag + 1.255*TyldLag + 5.966*DivLag Earnings Model: DJIAreturns = 0.067 – 4.639*CrSprdLag + 2.479*TrmSprdLag + 0.788*TyldLag + 0.924*EarnLag EBITDA Model: DJIAreturns = 0.008 – 4.018*CrSprdLag + 2.449*TrmSprdLag + 1.014*TyldLag + 1.002*EbitLag

  8. Regression Results:

  9. Regression Results: p-Values Dividend Model 0.0071 Earnings Model 0.1034 EBITDA Model 0.0078

  10. DJIA In-Sample Results:

  11. DJIA Out-Sample Results:

  12. Conclusions: • For DOW 30 Blue Chip Companies, EBITDA Yield is as good a predictor as Dividend Yield • Confidence interval on predictions from Earning Yield is less than 90% • ARCH underestimates DJIA in sample and in validation period

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