What Factors Influence Stock Returns the Most?

The positive or negative change in the value of an investment or asset over time is referred to as the stock return. A positive return indicates a profit on the investment, whereas a negative return indicates a loss on the investment. Stock returns are one of the most important factors for firms to consider because they are largely responsible for a company’s market capitalization and hence market worth. It also defines the company’s value and market and industry position. The stock performance also has a significant impact on a company’s cost of capital. Since stock returns are so important to businesses, this Chicago Booth Review study examines a few key criteria that have the greatest influence on stock returns.

The article describes how Eugene F. Fama of Chicago Booth and Kenneth R. French of Dartmouth pioneered the use of factors to explain typical excess returns of stocks and other assets, and how they have long held the notion that stocks have just a few common sources of risk. But, according to the article, both Fama and French were unable to precisely define the exact number of elements impacting stock returns. While they first offered three, they later increased to 5, with the occasional emergence of a sixth component. While introducing the three-factor model, Fama and French stated that market beta, size, and value may be utilized to explain average excess stock returns, according to the article. However, the article claims that they have recently developed a new technique based on cross-section regressions. According to the article, a regression is a statistical tool used to isolate and establish the relevance of a variable, similar to a test that helps assess if a feature such as leverage or industry performance might be contributing to driving a stock’s typical returns. Lastly, the article suggests that the researchers’ study strongly suggests that typical stock returns may still be explained by only a few factors rather than hundreds. Fama and French have paved the way for a change in how academics and market players utilize and apply factors by resolving a long-standing, problematic assumption in the way people have been evaluating and applying factors.

Stock returns are extremely valuable to every company. The above are a few key elements of the research conducted on the subject by Eugene F. Fama of Chicago Booth and Kenneth R. French of Dartmouth.