Does industrial financial analysis affect stock returns? International empirical evidence

The present study examines empirically the role of industrial financial information in explaining security returns in three major capital markets: UK, USA and France. It is hypothesized that the homogeneity across firms may not hold, due to industry specific differences across firms. The dataset consists of more than 40,000 USA, UK and French firmyear observations over a nine year period. Multivariate statistical regression analysis is undertaken to test the major research hypotheses. Results indicate that both earnings and cash flows are taken into consideration by investors in their investment decisions and that the industry the firm belongs to plays an important role in security analysis. More specifically, results indicate that in all industries, the French model has the highest explanatory power as measured by the R-square. This result is mostly made due to the increased importance of earnings to investors in France. Also, as expected, results indicate that the cash flow information is more useful to UK and USA investors than to French investors in all industries examined, and more importantly in the manufacturing and retail industries, where more discretion and manipulation exists in their financial reporting systems.