Financial Fundamentals and Stock Return Predictability Before and After COVID-19: Evidence from Indonesian LQ45 Firms

Abstract

The increasing volatility of financial markets following the COVID-19 pandemic has raised questions regarding the ability of traditional accounting fundamentals to predict stock returns. Previous studies provide inconsistent evidence concerning the effects of Total Asset Growth (TAG), Price Earnings Ratio (PER), Dividend Payout Ratio (DPR), and Dividend Yield (DY), particularly in emerging markets. This study examines the influence of these financial indicators on stock returns among 22 LQ45 companies listed on the Indonesia Stock Exchange during 2017–2022. Using panel data regression, structural comparison analysis, Clustered Standard Errors, and Fama-MacBeth estimation, the study evaluates the predictive ability of financial fundamentals before and after the COVID-19 pandemic. The results indicate that only PER significantly affects stock returns, while TAG, DPR, and DY remain insignificant. Furthermore, the pandemic weakened the informational relevance of accounting fundamentals. This study contributes to the Efficient Market Hypothesis and emerging market literature by demonstrating the declining predictive power of traditional accounting indicators during crisis periods. The study is limited to LQ45 firms and selected financial ratios. Future research should incorporate behavioral, macroeconomic, and ESG-related variables to improve stock return predictability.