387

Dutta, Bandopadhyay, and Sengupta
105
Prediction of Stock Performance in the

Indian Stock Market Using Logistic Regression
Avijan Dutta
Associate Professor & Head
Department of Management Studies
National Institute of Technology, Durgapur, India
avijand@yahoo.com
Gautam Bandopadhyay
Associate Professor
National Institute of Technology, Durgapur, India
Suchismita Sengupta
Associate Professor
IES Management College and Research Centre
Mumbai, India
sensmita123@gmail.com
ABSTRACT
The authors use logistic regression (LR) and various financial ratios as
independent variables to investigate indicators that significantly affect the
performance of stocks actively traded on the Indian stock market. The study
sample consists of the ratios of 30 large market capitalization companies over a
four-year period. The study identifies and examines eight financial ratios that can
classify the companies up to a 74.6% level of accuracy into two categories
good or poor based on their rate of return. The paper asserts that the model
developed can enhance an investor's stock price forecasting ability. Macroecomonic variables, which also can influence the share price, were not taken into
account, however. The paper dicusses the practical implications of using the LR
method to predict the probability of good stock performance. The authors state
that the model can be used by investors, fund managers, and investment
companies to enhance their abilty to select out-performing stocks.
Keywords: Classification of stock performance, Indian stock market, logistic
regression, market rate of return, financial ratios, NIFTY
Volume 7, Number 1, June 2012
106

1. INTRODUCTION
Global crashes do not occur all of a sudden but are headed by local and
regional crashes in emerging economies. Even when the investors are not
exposed to emerging stock markets, they should pay attention to these markets,
as local crashes can affect developed markets. Moreover, the interdependence is
relevant as well, in that interest rates, bond returns, and volatility also affect the
probabilities of the different types of stock market crashes.
It is important for shareholders and potential investors to use relevant
financial information to enable them to make good investment decisions in the
stock market. Predicting stock performance is certainly very complicated and
difficult. In the history of stock performance literature, no comprehensive,
accurate model has been suggested to date for predicting stock market
performance.
A stocks performance can, to some extent, be analyzed based on financial
indicators presented in the companys annual report. The annual report contains a
vast amount of information that can be transformed into various ratios. Previous
literature suggests that financial ratios are important tools for assessing future
stock performance. Analysts, investors, and researchers use financial ratios to
project future stock price trends. Ratio analysis has emerged, therefore, as one of
the key parameters used by fund managers and investors to determine the
intrinsic value of stock shares; thus, financial ratios are used extensively for the
valuation of stock. The study of financial ratios emerged as a new discipline after
stock market crashes in the 1990s and early 2000s in the United States and parts
of Europe and southern Asia. Today, ratios are used extensively in fundamental
analysis to predict the future performance of a company. Various new ratios,
such as book value and price/cash earnings per share, have been included in this
discipline for share valuation. Financial ratios help to form the basis of investor
stock price expectations and, hence, influence investment decision making. The
level of importance given to financial ratios differs from industry to industry and
from one country to another. Thus, selecting appropriate ratios is very crucial in
increasing the prediction success rate.
The objective of this paper is to apply statistical methods to survey and
analyze financial data in order to develop a simplified model for interpretation.
This study aims to develop a model for classifying stocks into two categories
International Journal of Business and Information
107
(good or poor), based on their rate of return. A companys stock is classified as

good if its share returns perform above the market returns provided by the
National Stock Exchange composite index of India; i.e., the NIFTY. In this
study, the logistic regression (LR) method has been used to classify selected
companies, based on their performance. The LR method is used to predict the
probability of good stock performance by fitting the variables to a logistic curve.
Thus, LR is used to classify a set of independent variables into two or more
mutually exclusive categories. It involves finding a linear combination of
independent variables that reflect large differences in group means.
2. REVIEW OF LITERATURE
In stock performance literature, little attention has been given in the past to
the Indian stock market. In recent years, however, there has been a greater focus
on the market because of its rapid growth and its increasing potential for global
investors. In light of the markets growing importance, more attention has been
directed to studies concerning different classification techniques for measuring
stock performance. A number of research papers predict stock performance as
well as pricing of the stock index across the globe. Harvey [1995] observes that
emerging market returns are usually more predictable than developed market
returns because emerging market returns are more likely to be influenced by local
information than developed markets.
In recent literature, artificial neural networks (ANN) have been successfully
used for modeling financial time series [Cheng, 1996; Van and Robert, 1997]. In
the United States, several studies have examined the cross-sectional relationship
between fundamental variables and stock returns. Fundamental variables such as
earnings yield, cash flow yield, book-to-market ratio, and size are demonstrated
to have some power in predicting stock returns [Fama and French, 1992]. Studies
based on European markets also demonstrate similar findings. Ferson and Harvey
[1993] observe that returns are predictable, to an extent, across a number of
European markets (e.g., UK, France, and Germany). Jung and Boyd [1996], in
their study of forecasting UK stock prices, suggest that the predictive strength of
their stock performance models is quite significant. In the Japanese stock market,
studies carried out by Jaffe and Westerfield [1985] and Kato et al. [1990] also
demonstrate some evidence of predictability in the behavior of index returns.
108

Logistic regression (LR), which is helpful for predicting the presence or

absence of a characteristic or outcome based on values of a set of predictor
variables, is a multivariate analysis model [Lee, 2004]. The applications of LR
have repeatedly been used in the area of corporate finance, banking, and
investments. Multivariate discriminant analysis (MDA) has been used by many
researchers for the default-prediction model. Altman [1968] was the pioneer in
this work, whereas Ohlson [1980] later used LR to construct the defaultprediction model. The early research on default prediction focuses on classifying
firms as either defaulters or non-defaulters. Ohlson [1980] identifies this
assumption of default prediction as an equal payoff state. Clearly, misclassifying
a defaulted firm as a non-defaulted firm would have repercussions that are more
severe for an investor or a loan officer than would be true in the the opposite
case. This research focuses, therefore, on the ability of the models to accurately
rank defaulted and non-defaulted firms, based on their default probability. In
predicting financial distress and bankruptcy, which have been widely applied as
evaluation models providing credit-risk information, Ohlson [1980] used LR, and
was then followed by several authors such as Zavgren [1985]. Subsequently, the
same trend was used by Zmijewski [1984] for probit analysis.
t and Akta [2009] found that data-mining techniques (ANN and SVM)
are better suited to detect stock-price manipulation than multivariate statistical
techniques such as discriminant analysis or LR, because the performances of
data-mining techniques in terms of classification accuracy are better than those of
multivariate techniques. They proposed a new binary classification method for
predicting corporate failure based on genetic algorithm, and proposed to validate
its prediction power through empirical analysis.
Min and Jeong [2009] compared prediction accuracy with other methods such
as multi-discriminant analysis, logistic regression, decision tree, and artificial
neural network, and showed that the binary classification method they proposed
can serve as a promising alternative to existing methods for bankruptcy
prediction.
Bildirici and Ersin [2009] proposed an ANN-APGARCH model to increase
the forecasting performance of the APGARCH model. The ANN-extended
versions of the GARCH models improved forecast results.
109
Mostafa [2010] showed that neuro-computational models are useful tools in

forecasting stock exchange movements in emerging markets. Their results also
indicated that the quasi-Newton training algorithm produces fewer forecasting
errors, compared with other training algorithms. Because of the robustness and
flexibility of modeling algorithms, neuro-computational models are expected to
outperform traditional statistical techniques such as regression and ARIMA in
forecasting price movements on stock exchanges.
Li et al. [2010] used LR as a comparative method in order to build a better
model for predicting stock returns effectively and efficiently. A 30 times holdout method was used in the assessment, along with the two commonly used
methods in the top 10 data mining algorithms (the support vector machine and k
nearest neighbor) and the two baseline benchmark methods from the statistical
area (MDA and LR).
Li and Sun [2011] observed that multiple classifiers outperform single
classifiers in terms of prediction accuracy and returns on investment. They
showed that there is no significant difference between majority voting and
bagging in prediction accuracy, but that the former has a better prediction
accuracy for stock returns than the latter. Finally, the homogeneous multiple
classifiers using neural networks by majority voting perform best when
predicting stock returns. The two classical statistical methods (MDA and logit)
have assumed a key role in the area of business failure prediction (BFP).
Chen [2011] carried out studies at the Taiwan Stock Exchange Corporation
(TSEC) to improve the accuracy of the financial distress prediction model and
collected 100 listed companies as the initial sample. The empirical experiment
included 37 ratios comprising financial and other non-financial ratios, and used
principal component analysis (PCA) to extract suitable variables. Decision tree
(DT) classification methods (C5.0, CART, and CHAID) and LR techniques were
used to implement the financial distress prediction model. The experiments
produced a satisfying result, verifying the possibility and validity of the proposed
methods for the financial distress prediction of listed companies.
Guresen et al. [2011] evaluated the effectiveness of neural network models,
which are known to be dynamic and effective in stock market predictions. The
models analyzed are multi-layer perceptron (MLP), the dynamic artificial neural
network (DAN2), and hybrid neural networks that use generalized auto-
110

regressive conditional heteroscedasticity (GARCH) to extract new input

variables. The comparison for each model is presented in two viewpoints.
Swiderski et al. [2012] demonstrated the new approach to the automatic
assessment of the financial condition of a company and developed the
computerized classification system, applying WOE representation of data and
LR, and using support vector machine (SVM) as the final classifier. The applied
method is a combination of a classical binary scoring approach and SVM
classification. The application of this method to the assessment of the financial
condition of companies, classified into five classes, has shown its superiority
with respect to classical approaches.
At the time of prediction, with the help of MDA, it was assumed that the
groups were of similar size as while predicting the default and non-default firms
in the prediction carried out by Altman [1968] and subsequent researchers. It
was shown that the number of non-default firms was never more than twice the
number of default firms. However, default or bankruptcy being a rare event, a
very high proportion of the non-defaulters was excluded from the analysis.
Besides being used to predict corporate fiascos, ratios are also used for scaling
or grouping industries according to the degree of risk. Horrigan [1965] found
financial ratios to be successful predictors for bond rating. Metnyk and Mathur
[1972] used ratios to classify corporations into similar risk groups and attempted
to relate them to the companies market rates of return; but, they did not report
favorable results. Conner [1973] studied five ratios namely, (1) total liabilities
to net worth, (2) working capital to sales, (3) cash flow to number of common
shares, (4) earnings per share to price per share, and (5) current liabilities to
inventory but found them to be poor indicators of return on common stock.
Different methodologies and financial ratios are used by various authors to
classify the performance of firms. Kumar and Ravi [2007] carried out a
comprehensive review of various work related to bankruptcy prediction problems
and found that neural network is the most widely used technique, followed by
statistical models. McConnell, Haslem, and Gibson [1986] have indicated that
qualitative data can provide additional information to forecast stock price
performance more accurately.
The LR technique yields coefficients for each independent variable based on a
sample of data [Huang, Chai, and Peng, 2007]. Logistic regression models
111
(LRM) with two or more explanatory variables are widely used in practice
[Haines et al., 2007]. The parameters of the LR model are commonly estimated
by maximum likelihood [Pardo, Pardo, and Pardo, 2005]. The advantage of LR is
that, through the addition of an appropriate link function to the usual linear
regression model, the variables may be either continuous or discrete, or any
combination of both types, and they do not necessarily have normal distributions
[Lee, 2004].
The predictor values from the analysis can be interpreted as probabilities (0 or
1 outcome) or membership in the target groups (categorical dependent variables).
It has been observed that the probability of a 0 or 1 outcome is a non-linear
function of the logit [Nepal, 2003]. Logistic regression is useful for situations in
which it is required to predict the presence or absence of a characteristic or
outcome based on values of a set of predictor variables. Logistic regression is
similar, therefore, to a linear regression model, but is proficient to models where
the dependent variable is dichotomous. Logistic regression coefficients can be
used to estimate odd ratios for each of the independent variables in the model.
Logistic regression helps to form a multivariate regression between a dependent
variable and several independent variables [Lee, Ryu and Kim, 2007]. It is
designed to estimate the parameters of a multivariate explanatory model in
situations where the dependent variable is dichotomous, and the independent
variables are continuous or categorical.
Existing literature indicates that LR has been rarely used to build a model for
predicting out-performing shares. Logistic regression has been used mostly for
predicting financial distress and business failure. It has not been used for
predicting share performance in India. In terms of investment destination in
share, India is a top performing emerging market. In this context, the present
study will provide useful information to shareholders and potential investors to
enable them to make good decisions regarding investments.
3. RESEARCH OBJECTIVE AND METHODOLOGY

In this study, the relation between financial ratios and stock performance of
the firms has been analyzed with the help of binary logistic regression. The
earlier studies mentioned above have generally indicated that logistic regression,
as used in the finance discipline, can be an effective tool for decision makers. It
112

has also been recognized that financial ratios can enhance an investor's stock
price forecasting ability.
The objective of this study is to build a model using financial ratios of the
firms for the purpose of predicting out-performing shares in the Indian stock
market. This study aims, therefore, to answer two questions: (1) Can the yields
of stocks be explained with the help of financial ratios? (2) Can we analyze stock
yields using a logistic regression model? The study also examines the efficacy of
ratios as predictors of stock performance.
3.1. Analysis of Model-Logistic Regression

Regression analysis is used to determine the magnitude of relationships
between variables as well as to model relationships between variables and for
predictions based on the models. Simple linear regression or multiple linear is
applicable when this relationship is assumed to be linear [Davis, 2005]. However,
a number of non-linear techniques could be used to obtain a more accurate
regression if the relationship between variables is not linear in parameters.
Logistic regression is preferred in case the response variable can take only binary
values (yes or no). The outcome of logistic regression is a function that describes
how the probability of the event (yes or no) varies with the predictors
[Tabachnick and Fidell, 2001].
Logistic regression could predict the likelihood, or the odds ratio, of the
outcome based on the predictor variables, or covariates. The significance of
logistic regression can be evaluated by the log likelihood test, given as the model
chi-square test, evaluated at the p < 0.05 level, or the Wald statistic. Logistic
regression has the advantage of being less affected than discriminant analysis
when the normality of the variable cannot be assumed. It has the capacity to
analyze a mix of all types of predictors [Hair, 1995]. Logistic regression, which
assumes the errors are drawn from a binomial distribution, is formulated to
predict and explain a binary categorical variable instead of a metric measure. In
logistic regression, the dependent variable is a log odd or logit, which is the
natural log of the odds.
Logistic regression allows one to predict a discrete outcome, such as group
membership, from a set of variables that may be continuous, discrete,
dichotomous, or a mix of any of these. Generally, the dependent or response
113
variable is dichotomous, such as presence/absence or success/failure. In instances

where the independent variables are categorical, or a mix of continuous and
categorical, logistic regression is preferred.
Since the probability of an event must lie between 0 and 1, it is unrealistic to
model probabilities with linear regression techniques, because the linear
regression model allows the dependent variable to take values greater than 1 or
less than 0. The logistic regression model is a type of generalized linear model
that extends the linear regression model by linking the range of real numbers to
the 0-1 range.
In the logistic regression model, the relationship between Z and the
probability of the event of interest is described by this link function.
pi= ezi
1+ezi
1
1+e-zi
Figure 1. Logistic Regression Model
Here the y-axis is the predicted variable pi and the horizontal axis denotes the
explanatory variable zi.
or
114

zi=log(pi/1pi)
where
pi is the probability the ith case experiences the event of interest, and
zi is the value of the unobserved continuous variable for the ith case.
The z value is the odds ratio. It is expressed by
zi= 0+1xi1+2xi2++pxip
where
xij is the jth predictor for the ith case,
j is the jth coefficient, and
p is the number of predictors.
Logistic regression analysis does not require the restrictive assumptions
regarding normality distribution of independent variables or equal dispersion
matrices nor the prior probabilities of failure [Ohlson, 1980; Zavgren, 1985].
Rather, logistic regression is based on two assumptions; (1) it requires the
dependent variable to be dichotomous, with the groups being discrete, nonoverlapping, and identifiable; and (2) it considers the cost of type I and type II
error rates in the selection of the optimal cut-off probability. s are the
regression coefficients that are estimated through an iterative maximum
likelihood method. However, because of the subjectivity of the choice of these
misclassification costs in practice, most researchers minimize the total error rate
and, hence, implicitly assume equal costs of type I and type II errors [Ohlson,
1980; Zavgren, 1985].
3.2. Application of Logistic Regression

We begin this section with a discussion of data sources. In this context, the
companies with large market capitalizations have been considered, of which,
most of these companies are part of the NIFTY index. The financial data used in
115
this analysis was collected from the Web link www.moneypore.com. The sample
of the study was drawn from the 30 companies that are most actively traded on
the Indian stock exchange as given in Appendix 2. Financial ratios and stock
prices for calculating return were then collected. In this research, a sample period
consisting of four years (2005-2008) was selected for classification purposes.
For the purpose of carrying out logistic regression analysis, first a method is
required for classifying a company as a good or poor investment choice for a
given year. Although there is no definitive method for defining a market
investment as good or poor, in this study we use a method that is simple and
objective namely, if the value of a companys stock over a given year rose
above market return, it is classified as a good investment option; otherwise, it
is classified as a poor investment option. Here, the NIFTY (Index of National
Stock Exchange) return has been taken as proxy for market return. To obtain the
return at the end of each financial year, the March ending prices were used for
each year.
The return was calculated using the following formula:
Return of stock =
100
where,
Pt= Price at the T year
Pt-1= Price at the T -1year
Market return =
100
Similarly, NIFTY(t) = NIFTY at the t year, and NIFTY(t-1) = NIFTY at the (t-1)
year.
The sample in this study is based on the selection of 30 companies for a fouryear period (2005 through 2008). The study consists of a sample size of 118
distinct companies year-wise observations. As discussed, we have used twp
dependent variables (good or poor) and six independent variables. Initially,
116

16 financial ratios were taken for analysis. A normality test was conducted on all
these explanatory variables. The results of the test are summarized and presented
in Table 1, which shows that six variables are normal. The normality test was
used to give a better prediction result. The table also shows that the P-value for
all six variables is greater than 0.05, which implies that these variables are
normal.
Table 1
One-Sample Kolmogorov-Smirnov Test
%
Increase
N
Normal Parametersa
Std.
Deviation
Most Extreme
in Net
Earning
Book
Earning
Sales
per share
Value
per Share
118
Mean
Price/cash
118
118
Sales
Assets
118
118
47.1581 230.8910
17.8159 31.7651
1.2439
.18741 35.20981 167.75761
9.36982 18.71652
0.88254
.2653
118
PBIDT/ Sales/Net
Absolute
0.112
0.113
0.109
0.115
0.119
0.123
Positive
0.112
0.113
0.100
0.115
0.119
0.123
Negative
-0.062
-0.113
-0.109
-0.071
-0.105
-0.094
Kolmogorov-Smirnov Z
1.220
1.231
1.181
1.253
1.288
1.333
Asymp. Sig. (2-tailed)
0.102
0.097
0.123
0.087
0.073
0.057
Differences
The variables were also tested using a Q-Q plot, as shown in Appendix 1. The
variables that were not normal were not considered for further analysis. The six
independent variables considered for final analysis are presented in Table 1. The
six ratios are mostly the valuation ratios, which generally determine the value of
share in the stock market. As a matter of fact, the dependent variable or outcome
is a dichotomous one, and, hence, has been rated GOOD = 1 and POOR = 0 to
117
signify the investment choice. Out of to 118 samples, 68 have been classified as
poor and 50 as good.
Table 2
Dependent Variables
Type of Company
(based on stock market return)
GOOD
Return above Market return; i.e.,

NIFTY
Return below Market return; i.e.,
NIFTY
POOR
Table 3
Dependent Variable Encoding
Original Value
Internal Value
Poor
Good
0
1
Table 4
Independent Variables
Name of the Variable
Description of the Variable
NS
CEPS
BV
PECEPS
PE
PBIDTS
Percentage Increase in Net Sales

Cash Earnings per Share
Book Value
Price/Cash Earnings Per Share
Price/Earning
Profit Before Interest
Depreciation and Tax/Sales
Sales/Net Assets
Price/Book value
SNA
PEBV
118

4. EMPIRICAL RESULT AND ANALYSIS

The estimated results of the logistic regression model of the stock price return
performance, along with the whole sample, are summarized in Table 5. The final
logistic regression equation is estimated by using the maximum likelihood
estimation for classifying a company:
Z= -3.425 + 1.064 * NS + 0.001 * BV + 0.004 * CEPS+.069*PECEPS + 0.014
* PE + 0.006 * PBIDTS + 0.393 * SNA+0.0288*PEBV ,
where
z= log (p/1-p),
and p is the probability that the outcome is GOOD.
In the above equation, it is possible to classify a company by calculating Z
values. P values can be obtained from Z values. If the P value is higher than 0.42,
then the stock was classified as good; and, if it is lower than 0.42, then the stock
was classified as poor.
Table 5
(Using SPSS)
Variables in the Equation
Sta ep
1
NS
BV
CEPS
PECEPS
PE
PBIDTS
SNA
PEBV
Constant
B
1.064
.001
.004
.069
.014
.006
.393
.028
-3.425
S. E.
1.212
.003
.010
.044
.015
.016
.374
.131
1.168
Wald
.771
.054
.207
2.424
.828
.157
1.106
.046
8.594
df
1
1
1
1
1
1
1
1
1
Sig.
.380
.816
.649
.120
.363
.692
.293
.830
.003
Exp(B)
2.898
1.001
1.004
1.072
1.014
1.006
1.482
1.029
.033
a. Variable(s) entered on step 1: NS, BV, CEPS, PECEPS, PE, PBIDTS, SNA, PEBV.
The ratio of B to S.E., squared, equals the Wald statistic. It provides the
statistical significance of each estimated coefficient. If the logistic coefficient is
statistically significant, we can interpret it in terms of how it impacts the
119
estimated probability and thus the prediction of group membership. Several

authors have identified problems with the use of the Wald statistic. Menard
[1995] warns that, for large coefficients, standard error is inflated, lowering the
Wald statistic (chi-square) value. Agresti [1996] states that the likelihood-ratio
test is more reliable for small sample sizes than the Wald test. Maximization of
Wald statistics indicates minimizing the standard error of the corresponding
parameter. Wald statistics actually provide the significant test of the coefficients.
4.1. Classification Accuracy

The following classification table helps to assess the performance of the
model by cross-tabulating the observed response categories with the predicted
response categories.
For each case, the predicted response is the category treated as 1, if that
category's predicted probability is greater than the user-specified cutoff. The
cutoff value is taken at 0.5.
Table 6
Classificati on Tablea
Predicted
St ep 1
Observ ed
Perf
POOR
GOOD
Ov erall Percentage
Perf
POOR
GOOD
51
17
13
37
Percent age
Correct
75.0
74.0
74.6
a. The cut v alue is . 410
This table shows the comparison of the observed and the predicted performance
of the companies and the degree of their prediction accuracy. It also shows the
degree of success of the classification for this sample. The number and
percentage of cases correctly classified and misclassified are displayed. It is clear
from this table that the poor companies have a 75% correct classification rate,
whereas good companies have a 74% correct classification rate. Overall, correct
classification was observed in 74.6% of original grouped cases.
120

The plot of the distribution of the firms against the probability is shown above.
The graph shows another method to evaluate right and wrong predictions by
plotting POOR (P) and GOOD (G) status.
The cutoff probability for the decision taken is 0.42 (or 42%). Thus, using
this cutoff value, any company whose score is higher than 0.42 would be
predicted to be a good performing company, and any company with a score less
than 0.42 would be classified as a poor performing company. However, there
may be times when one would want to adjust this cutoff value. Neter et al.
[1996] suggest three ways to select a cutoff value for predicting:
Use the standard 0.42 cutoff value.

Determine a cutoff value that will give the best predictive fit for
the sample data. This is usually determined through trial and
error.
Select a cutoff value that will separate the sample data into a
specific proportion of the two states, based on a prior known
proportion split in the population.
121
4.2. Tests of Goodness of Fit

The Hosmer-Lemeshow [1989] goodness of fit test is well known when
data are obtained from a simple random survey. The procedure involves grouping
the observations based on the expected probabilities and then testing the
hypothesis that the difference between expected and observed events is
approximately zero for all the groups. Hosmer-Lemeshow [1989] proposed a
statistic that they show through simulation. It is distributed as chi-square when
there is no replication in the subpopulations. This test is available only for binary
response models. The Hosmer-Lemeshow [1989] statistic evaluates the
goodness-of-fit by creating 10 ordered groups of subjects and then compares the
number actually in the each group (observed) to the number predicted by the
logistic regression model (predicted). Thus, the test statistic is a chi-square
statistic with a desirable outcome of non-significance, indicating that the model
prediction does not significantly differ from the observed.
The present study also estimated the Hosmer and Lemeshow statistic,
which provides useful information about the calibration of the model. The
observed significance level for chi-square value is found to be 0.217 (Hosmer
and Lemeshow test), which indicates acceptance of the null hypothesis of the
model, meaning there is not much difference between observed and predicted
values. This result shows that the model appears to fit the data reasonably well.
The chi-square value (10.737) of this model at the 0.01 significance level
indicates that logistic regression is very meaningful, in accordance with the
dependent variable relating to each specified independent variables.
Table 7
(Using SPSS)
Hosmer and Lemeshow Test

Step
1
Chi-square
10.737
df
8
Sig.
.217
122

The omnibus tests are the measures of how well the model performs. They
test whether the explained variance in a set of data is significantly greater than
the unexplained variance, overall.
Table 8
(Using SPSS)
Omnibus Tests of Model Coefficients

St ep 1
St ep
Block
Model
Chi-square
21.757
21.757
21.757
df
8
8
8
Sig.
.005
.005
.005
If the step were to remove a variable, the exclusion makes sense if the
significance of the change is large (i.e., greater than 0.10).
If the step were to add a variable, the inclusion makes sense if the
significance of the change is small (i.e., less than 0.05).
5. CONCLUSION
This study used the binary logistic regression model to determine the factors
that significantly affect the performance of a company in the stock market. The
binary logistic regression method helps the investor to form an opinion about the
shares to be invested. It may be observed that eight financial ratios can classify
companies up to a 74.6% level of accuracy into two categories (good or
poor), based on their rate of return. The eight financial ratios are:
Percentage change in net sales (NS)
Sales/net assets (SNA)
Price/cash earnings per share (PECEPS)
Price/book value (PEBV)
Price/earnings per share (PE)
PBIDT/sales (PBIDT)
Cash price/earnings per share (CEPS)
Book value (BV)
123
When evaluated from the investors point of view, we conclude that it is

possible to predict out-performing shares by examining these ratios. Various
methods are available for data processing for analysis, but in this study, we
conclude that ratio methods have the capability to reveal maximum information
content, if variables are chosen very carefully with regard to the purpose at hand.
Ratios enjoy remarkable simplicity and, in spite of the problem of multi
collinearity, the information revealed by them is so direct to a particular decisioncontrol situation that movements of ratio give a picturesque representation of the
movement of an actual business process.
In this study, data for 12 months were taken into consideration, and, at the end
of 12th month, stock share prices were compared with those of the previous year
to determine performance. In further studies, data for each three-month period
can be used, and different criteria can be defined, for evaluating stock
performance. This study used financial ratios as the only factor affecting share
prices, but there may be various other economic and management factors that
may also influence share prices. McConnell, Haslem, and Gibson [1986] have
shown that qualitative data can provide additional information to forecast stock
price performance more accurately.
Further studies can use qualitative data for improving forecasting ability. In
the current study, only logistic regression was considered to build the model.
Therefore, for further development, this study proposes to investigate and use
various approaches such as the genetic algorithm, rough set approach to increase
the prediction ratio.
124

Appendix 1
125
126

127
Appendix 2
Sample Data Set (118 Observations)
Year
2008
2007
2006
2005
2008
2007
2006
2005
2008
2007
2006
2008
2007
2006
2005
2008
2007
2006
2005
2008
2007
2006
2005
2008
2007
2006
2005
Perf
POOR
POOR
GOOD
POOR
GOOD
POOR
POOR
POOR
POOR
GOOD
POOR
GOOD
GOOD
GOOD
POOR
GOOD
POOR
POOR
POOR
POOR
POOR
GOOD
POOR
GOOD
POOR
POOR
POOR
Company
Tata motor
Tata motor
Tata motor
Tata motor
Tata Steel
Tata Steel
Tata Steel
Tata Steel
TCS
TCS
TCS
Sterlite
Sterlite
Sterlite
Sterlite
Tata Power
Tata Power
Tata Power
Tata Power
Satyam
Satyam
Satyam
Satyam
SBI
SBI
SBI
SBI
NS
0.04
0.34
0.17
0.33
0.12
0.15
0.08
0.33
0.24
0.33
0.4
0.09
0.6
0.87
0.35
0.26
0.03
0.16
-0.07
0.31
0.34
0.34
0.36
0.31
0.03
0.1
0.04
EPS
50.52
47.1
37.59
32.44
61.06
69.95
61.51
60.91
43.69
36.66
53.63
12.75
13.48
44.84
9.25
38.26
33.59
29.66
26.8
24.99
20.77
37.22
22.85
103.94
83.91
81.77
80.01
BV
202.68
177.57
143.93
113.64
298.7
240.22
176.19
127.51
111.43
82.35
114.64
185.82
79.82
366.97
324.09
352.27
291.77
267.76
248.36
109.71
86.65
133.57
100.77
776.48
594.69
525.25
457.38
PECEPS
9.24
11.68
18.22
9.22
9.56
5.35
7.1
5.56
16.76
30.65
32.5
48.51
29.52
31.06
36.41
22.79
10.54
13.25
7.95
14.59
20.7
20.71
15.65
13.94
10.41
10.05
6.97
PBIDTS
11.11
11.16
12.11
11.51
39.79
37.1
36.11
38.72
29.49
30.23
29.69
10.48
9.94
11.99
7.4
24.15
22.62
26.06
33.27
25.63
27.47
33.91
28.05
66.15
59.83
56.99
57.62
SNA
2.33
2.91
2.8
3.06
0.49
0.84
1.43
1.66
1.68
1.84
1.99
0.82
1.7
1.26
0.69
0.54
0.49
0.55
0.49
1.1
1.07
1.07
1.07
0.3
0.29
0.26
0.2
--Continued
128

Year
Perf
2008
GOOD
2007
GOOD
2006
GOOD
2005
POOR
2008
GOOD
2007
POOR
2006
POOR
2005
POOR
Company
Reliance
Industries
Reliance
Industries
Reliance
Industries
Reliance
Industries
Reliance
Energy
Reliance
Energy
Reliance
Energy
Reliance
Energy
NS
EPS
BV
PECEPS
BIDTS
SNA
0.18
131.97
542.83
13.7
20.78
1.2
0.33
84.28
439.67
11.51
17.34
1.29
0.22
63.7
324.11
9.04
16.81
1.24
0.3
53.3
270.43
6.82
19.49
1.24
0.1
44.97
430.21
22.99
26.45
0.4
0.46
34.16
374.19
11.09
23.62
0.38
-0.05
29.92
327.54
13.2
33.42
0.33
0.18
27.4
267.3
2008
2007
POOR
POOR
ONGC
ONGC
0.06
0.18
72.65
68.4
330.16
289.51
11.5
25.3
0.44
12.39
11.57
44.38
44.45
0.73
0.74
2006
2005
POOR
POOR
ONGC
ONGC
0.03
0.44
94.89
85.61
378.42
328.53
11.85
9.87
49.93
43.35
0.73
0.83
2008
2007
GOOD
POOR
NTPC
NTPC
0.14
0.22
8.4
7.85
65.5
59.73
17.92
14.44
38.38
39.51
0.46
0.45
2006
2005
POOR
POOR
NTPC
NTPC
0.18
0.2
6.67
6.72
55.06
51.07
14.65
9.43
39.65
43.06
0.41
0.38
2008
2007
POOR
POOR
Maruti
Maruti
0.22
0.17
59.03
53.29
291.19
237.16
10.54
13.08
14.89
15.05
2.26
2.3
2006
2005
GOOD
POOR
0.11
0.21
40.65
29.25
188.67
151.52
17.3
9.34
13.93
13.48
2.67
2.85
0.15
44.54
181.44
12.76
13.47
1.86
0.21
43.1
148.72
15.03
14.73
2.16
0.21
35.26
124.06
14.31
14.35
2.45
POOR
GOOD
Maruti
Maruti
Mahindra
&Mahindra
Mahindra
&Mahindra
Mahindra
&Mahindra
Mahindra
&Mahindra
L&T
2008
POOR
2007
GOOD
2006
GOOD
2005
2008
0.3
0.41
44.02
71.73
176.64
325.95
8.22
38.56
12.14
13.98
2.54
1.92
2007
2006
GOOD
GOOD
L&T
L&T
0.2
0.12
47.65
70.58
202.67
335.57
30.38
31.04
12.83
11.08
2.29
2.47
2005
GOOD
L&T
0.35
71.94
256.98
12.65
11.18
2.58
--Continued
129
Year
2008
Perf
POOR
Company
Jaiprakash
NS
0.06
EPS
72.65
BV
330.16
PECEPS
12.39
PBIDTS
44.38
SNA
0.73
2007
2006
2005
2008
2007
2006
2005
2008
2007
2006
2005
2008
POOR
POOR
POOR
POOR
GOOD
POOR
POOR
GOOD
POOR
GOOD
GOOD
POOR
Jaiprakash
Jaiprakash
Jaiprakash
Infosys
Infosys
Infosys
Infosys
ITC
ITC
ITC
ITC
ICICI
0.18
0.03
0.44
0.19
0.46
0.32
0.44
0.11
0.19
0.22
0.13
0.37
68.4
94.89
85.61
72.5
64.35
81.41
68.96
7.68
6.65
5.58
83.92
36.02
289.51
378.42
328.53
235.84
195.14
249.89
194.15
31.85
27.59
23.97
315.63
417.64
11.57
11.85
9.87
17.43
27.74
30.98
28.55
23.32
19.75
30.15
13.92
18.68
44.45
49.93
43.35
36.2
35.15
34.85
36.41
23.58
22.31
22.05
25.4
69.68
0.74
0.73
0.83
1.16
1.18
1.31
1.31
1.74
1.81
1.77
1.64
0.34
2007
2006
2005
2008
2007
2006
2005
2008
2007
2006
2005
2008
GOOD
POOR
POOR
GOOD
GOOD
GOOD
POOR
GOOD
GOOD
POOR
POOR
GOOD
ICICI
ICICI
ICICI
HDFC
HDFC
HDFC
HDFC
HDFC BANK
HDFC BANK
HDFC BANK
HDFC BANK
Hindalco
0.5
0.5
0.07
0.5
0.38
0.26
0.11
0.5
0.45
0.49
0.26
0.06
32.88
27.35
25.99
81.53
58.33
47.58
39.19
43.42
34.55
27.04
20.84
23.01
270.35
249.55
170.34
420.64
219.42
179.05
155.87
324.39
201.42
169.24
145.86
141.02
21.91
17.15
11.56
29.03
25.76
27.65
18.19
25.84
22.92
23.63
21.35
5.93
67.23
62.67
66.23
96.63
95.86
95.02
94.81
52.24
52.42
49.22
51.8
18.71
0.3
0.26
0.24
0.11
0.09
0.08
0.08
0.25
0.26
0.19
0.19
0.81
2007
2006
2005
2008
2007
2006
2008
2007
2006
2005
POOR
POOR
POOR
POOR
GOOD
GOOD
GOOD
POOR
GOOD
POOR
Hindalco
Hindalco
Hindalco
Bharti Airtel
Bharti Airtel
Bharti Airtel
Grasim
Grasim
Grasim
Grasim
0.61
0.19
0.57
0.44
0.59
0.42
0.21
0.26
0.06
0.17
24.34
16.49
140.43
32.9
21.27
10.62
239.03
163.68
91.36
94.34
119.03
97.46
826.32
106.34
60.19
38.71
887.12
679.19
543.01
471.65
4.4
8.4
6.8
16.66
22.66
21.97
9.28
10.54
16.71
9.68
21.82
23.34
24.65
41.72
40.7
36.23
31.43
27.64
20.96
23.98
1
0.84
0.9
0.96
1.07
0.93
1.03
1.05
1.1
1.14
--Continued
130
Year
2008
2007
2006
2005
2008
2007
2006
2005
2008
2007
2006
2005
2008
2007
2006
2005
2008
2007
2006
2005
2008
2007
2006
2005
2008
2007
2006
2005

Perf
GOOD
POOR
GOOD
POOR
POOR
GOOD
GOOD
POOR
GOOD
GOOD
POOR
GOOD
POOR
POOR
GOOD
POOR
POOR
POOR
GOOD
POOR
GOOD
POOR
GOOD
POOR
POOR
GOOD
GOOD
GOOD
Company
BHEL
BHEL
BHEL
BHEL
Sun Pharma
Sun Pharma
Sun Pharma
Sun Pharma
SAIL
SAIL
SAIL
SAIL
Dr Reddy
Dr Reddy
Dr Reddy
Dr Reddy
Wipro
Wipro
Wipro
Wipro
Asian Paints
Asian Paints
Asian Paints
Asian Paints
Shree_Cement
Shree_Cement
Shree_Cement
Shree_Cement
NS
0.14
0.29
0.4
0.19
0.39
0.32
0.39
0.26
0.16
0.21
0.02
0.33
-0.15
0.92
0.29
-0.07
0.28
0.34
0.41
0.4
0.21
0.21
0.19
0.15
0.51
0.96
0.14
0.19
EPS
55.82
94.86
66.57
37.86
47.16
31.57
24.06
15.94
17.62
14.54
9.44
16.06
27.62
69.45
26.82
7.85
19.94
18.61
13.47
20.55
36.23
26.51
17.72
16.81
73.38
49.96
4.58
7.78
BV
220.1
359.06
298.31
246.24
203.15
126.58
78.8
59.51
55.84
41.92
30.51
24.95
286.11
260.44
294.93
271.05
79.05
63.86
45.03
69.54
96.8
77.57
64.87
59.66
193.11
130.47
85.05
83.09
PECEPS
33.23
21.32
29.33
16.4
24.69
31.03
33
26.62
8.96
6.53
6.74
3.35
15.86
9.4
34.36
37.07
18.44
26.49
35.99
28.94
29.48
24.55
28.67
17.96
5.12
5.29
17.3
7.87
PBIDTS
21.92
21.31
19.46
17.82
34.68
30.21
31.04
29.34
28.17
27.78
22.58
34.8
22.05
38.35
18.99
9.19
22.89
25.75
25.67
26.77
15.18
13.86
12.77
13.75
36.84
39.3
24.9
24.25
NVA
2
2.14
1.88
1.61
0.74
0.65
0.54
0.43
1.77
1.85
1.96
2.03
0.65
0.86
0.66
0.69
1.14
1.44
1.59
1.47
3.99
3.89
3.93
3.58
1.22
1.12
1.14
1.11
131
Appendix 3
Evaluation Data Set (22 Observations)
Year
Perf
NS
EPS
BV
0.076155
44.64
0.089039
GOOD
Company
TATA
Tea
TATA
Tea
TATA
Tea
TATA
Tea
India
Infoline
India
Infoline
Unitech
Ltd
PECEPS
PBIDTS
2008
GOOD
2007
POOR
2006
GOOD
2005
POOR
2008
GOOD
2007
GOOD
2008
2007
GOOD
2006
2005
2008
POOR
2007
POOR
2006
GOOD
2005
2008
288.19
17.81
40.68
0.45
49.26
257.81
11.6
39.22
0.46
0.085851
31.57
202.67
24.78
27.49
0.71
0.149453
21.53
182.69
20.62
22.19
0.74
1.345285
21.52
173.35
30.9
37.16
0.6
4.789984
9.97
56.88
26.84
34.98
0.78
0.119135
6.31
13.21
43.42
63.07
0.27
Unitech
2.832803
12.03
14.3
32.04
61.62
0.53
GOOD
Unitech
0.282665
53.93
179.78
49.38
22.71
0.72
GOOD
0.362027
23.43
139.24
13.41
13.24
1.02
0.150905
2.8
10.91
10.67
9.87
3.24
0.184275
2.45
8.61
12.15
9.84
3.38
0.178203
3.25
11.45
20.75
10.35
4.1
GOOD
Unitech
Berger
Paints
Berger
Paints
Berger
Paints
Berger
Paints
0.230131
2.42
10.2
13.02
9.07
3.52
POOR
Pidilite
0.319534
7.15
25.28
15.32
16.65
1.49
2007
POOR
Pidilite
0.235473
4.5
19.33
19.84
14.99
2.06
2006
GOOD
Pidilite
0.173607
3.34
16.34
23.74
15.56
2.24
2005
POOR
0.177303
27.48
141.62
10.87
15.41
2.13
2008
POOR
-0.17658
1.22
34.59
6.72
3.84
2.57
2007
POOR
0.198751
2.68
34.07
9.36
4.77
3.23
2006
GOOD
0.123598
4.74
32.26
16.1
7.59
3.44
2005
POOR
Pidilite
TVS
Motors
TVS
Motors
TVS
Motors
TVS
Motors
0.018785
5.61
28.58
7.35
8.98
4.15
SNA
132

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ABOUT THE AUTHORS

Avijan Dutta is a faculty member in the Department of Management studies, National
Institute of Technology, Durgapur, India. He obtained his post-graduate degree in
management from IIM-Ahemdabad, and received his Ph.D. from Jadavpur University. He
has published several articles in leading journals. He was awarded the Silver Medal for
the Best Research Paper at the Association of Indian Management Schools convention
held at Hyderabad in 2005. He was also awarded 2 nd place in the Best Case Writing
competition at AIMS Western Region conference in 2005. He has conducted in-company
training programs for Indian companies such as Reliance and Sterilite Industries. His
areas of research interest are capital market and investment management.
Gautam Bandyopadhyay is an associate professor in the Department of Management
Studies, National Institute of Technology, Durgapur. He has extensive experience in
136

teaching and research activities. He received his Ph.D. from the Department of
Mathematics at Jadavpur University. He is also a fellow member of the Institute of Cost
& Works Accountants of India, and has presented several research papers at international
conferences in India and elsewhere. He is the author of many research papers in peerreviewed journals of national and international repute. He is now guiding several Ph.D.
students, and has advised others who have completed their Ph.D.
Suchismita Sengupta is an associate professor at the IES Management College and
Research Centre, Mumbai, India, and has 16 years experience in teaching, research, and
consultancy. She has a M.Com, MBA, a masters degree in international business
operations, and a Ph.D. in finance. She is actively involved in research and in the
publication and review process of a few international journals. She has published nine
papers in refereed national and international journals and has contributed book chapters
published by Allied Publishers, Deep and Deep, and McMillan Advance Research Series.
She has provided consulting services to clients on business operations and has carried out
various projects on a collaborative basis. She has experience in training and development,
identification of training needs with competency mapping activities, and conducting
training programs to enhance the efficiency in overall business operations. She has also
reviewed research papers for foreign journals.

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Dutta, Bandopadhyay, and Sengupta

Prediction of Stock Performance in the

Volume 7, Number 1, June 2012

Prediction of Stock Performance in the

International Journal of Business and Information

Dutta, Bandopadhyay, and Sengupta

(good or poor), based on their rate of return. A companys stock is classified as

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Prediction of Stock Performance in the

Logistic regression (LR), which is helpful for predicting the presence or

International Journal of Business and Information

Dutta, Bandopadhyay, and Sengupta

Mostafa [2010] showed that neuro-computational models are useful tools in

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Prediction of Stock Performance in the

regressive conditional heteroscedasticity (GARCH) to extract new input

International Journal of Business and Information

Dutta, Bandopadhyay, and Sengupta

3. RESEARCH OBJECTIVE AND METHODOLOGY

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Prediction of Stock Performance in the

3.1. Analysis of Model-Logistic Regression

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Dutta, Bandopadhyay, and Sengupta

variable is dichotomous, such as presence/absence or success/failure. In instances

Figure 1. Logistic Regression Model

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Prediction of Stock Performance in the

3.2. Application of Logistic Regression

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Dutta, Bandopadhyay, and Sengupta

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Prediction of Stock Performance in the

.18741 35.20981 167.75761

Asymp. Sig. (2-tailed)

International Journal of Business and Information

Dutta, Bandopadhyay, and Sengupta

Return above Market return; i.e.,

Description of the Variable

Percentage Increase in Net Sales

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4. EMPIRICAL RESULT AND ANALYSIS

Dutta, Bandopadhyay, and Sengupta

estimated probability and thus the prediction of group membership. Several

4.1. Classification Accuracy

a. The cut v alue is . 410

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Prediction of Stock Performance in the

Use the standard 0.42 cutoff value.

International Journal of Business and Information

Dutta, Bandopadhyay, and Sengupta

4.2. Tests of Goodness of Fit

Hosmer and Lemeshow Test

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Omnibus Tests of Model Coefficients

International Journal of Business and Information

Dutta, Bandopadhyay, and Sengupta

When evaluated from the investors point of view, we conclude that it is

Volume 7, Number 1, June 2012

Prediction of Stock Performance in the

International Journal of Business and Information

Dutta, Bandopadhyay, and Sengupta