Abstract

The purpose of this study is to empirically investigate the effect of microeconomic variables on stock return with moderating role of money supply (MS). The selected microeconomic variables in this study are debt-to-equity ratio (DE), dividend per share (DPS), and quick ratio (QR). Firm size and book-to-market value are considered as controlling variables. The period of the study is from 2003 to 2012 and the sample population of this study is 300 companies listed on Kuala Lumpur Stock Exchange (KLSE). Secondary data were collected from DataStream International, financial annual reports, and the World Bank databank. Generalized least squares (GLS) technique was used to estimate the predictive regressions in form of multiple models of panel data sets. According to the findings, MS moderates the impact of DE and QR on stock return, but does not moderate the effect of DPS on stock return. Besides, MS moderates the impact of all selected predictors on stock return. The findings of this study further show that an increase in value of a firm’s debt relative to its equity would cause a decrease in the firm’s stock return. The results also indicate that firms with higher QR and DPS are likely to have a higher stock return. Overall, the findings of this research are consistent with Modigliani and Miller's capital structure theory, as well as Pecking Order and Bird In Hand theory. The findings of this study would be of interest to domestic and international investors, stockbrokers, board of directors, financial managers, and policy makers.

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