The Ability of Financial Ratios to Predict the Index of Banking Sector in Amman Stock Exchange: An empirical study

Abstract

The main objective of this study is to test the predictive power of the financial ratios (ownership ratio, liquidity ratio, debt ratio, stock turnover ratio, return on equity ratio, return on total assets ratio, and market to book ratio) on the performance of the banking sector in Amman Stock Exchange (ASE). The analysis relies on yearly data for the period 2000-2014. The sample consists of fourteen banks listed on Amman Stock Exchange. Using the ordinary least square method (OLS), we regress the seven selected variables against the index of the banking sector. The findings show that the financial ratios can predict the behavior of the index in the banking sector. There is a statistically significant positive relationship between the liquidity ratio, debt ratio, stock turnover ratio, return on total assets ratio, market to book ratio with the banking index. While the return on equity is negatively associated with the banking index. There is no statistically significant relationship between the ownership ratio and the index in the Amman Stock Exchange.