Financial Signaling and Stock Return Movements: New Evidences in Indonesian Stock Markets after Covid-19

Economic and business uncertainty following Covid-19 resulted in more volatile returns in Indonesian stock market, a situation that requires investors to more carefully assess what financial signals drive returns. This allows them to select the right shares into their portfolio. To help investors overcome the problem, we specify a logit model that links stock returns with several financial signals including profitability, leverage, activity, market multiple and dividend policy, using data 661 non-financial firms listed on the Indonesia Stock Exchange. The statistical results are compared with investor opinions obtained from a Focus Group Discussion. We found surprising facts in Indonesian equity market that signals observed in previous studies influence stock returns, most of them have insignificant coefficients in this study. However, there are three signals that significantly affect stock returns, consisting of two profitability signals, return on assets and earnings per-share, with a positive coefficient and one leverage signal, debt to equity, with a negative coefficient. we then examine our results deeply by considering firm size, shariah and industry classification, three characteristics of the Indonesian stock market. Size is important due to the strong effect of profitability on stock returns for large firms and that stock returns move in the opposite direction with leverage for small size firms, describing higher risks for small firms. Earning per-share is significant for sharia group data, reflecting sharia investors prefer real returns on their investments but tend to ignore debt. Finally, our results are not influenced by industry classification.