Predictive Power of Financial Ratios With Regard To the Turkish Banking Industry: An Empirical Study on the Stock Market Index

Abstract

In this study, it is examined whether changes in the stock market index can be explained by the change in financial ratios. Financial statements of 11 conventional and 2 participation banks for a total of 13 banks (representing the essential part of the Turkish Banking Sector and constituting the BIST XBANK Stock Index) announced on a quarterly basis from 2002 to 2013 were extracted from the Public Disclosure Platform website. The contemporaneous financial statements were merged and by using this data, consolidated financial ratios were obtained. Based on empirical evidence, while an increase in debt-to- equity ratio affects the BIST XBANK Index negatively, shareholders' equity to total assets ratio has a positive impact on the growth of the Index. In addition, it is verified that shareholders' equity to total assets ratio and provisions/non-performing loans ratio have a causal relationship with the BIST XBANK Index.