Efficient Market Hypothesis :

Evidence from Indonesia Stock Exchange (IDX)

Siti Rahmi Utami

Mahasiswa Program Doktor
Trisakti International Business School Maastricht School of
Management

Abstract

In this research we test market efficiency in Indonesia Stock Exchange

(IDX) by examining whether stock price changes is independent of past
changes or not, and examining do profitability, liquidity, debt, and
market value information of the firms have influence on stock returns,
hence these information can be used to estimate the future stock
returns. We use stock price and return as dependent variable, and
financial ratios as independent variables. We have applied Ljung-Box Q-
Test and regression to analyze the data, and collected the data of
companies from the Indonesia Stock Exchange from the year 1994 to
2005. The sample size consists of 77 companies from all sector
companies of LQ 45 Index.
Ljung-Box Q-Test result has shown that the significant amount of
lag are 16, therefore there is autocorrelation between current price and
previous price, and we conclude that market is not efficient in weak-
form. Meanwhile, regression results have shown that profitability
information (ROA) has negative significant effect on stock returns,
while ROE has positive significant effect on stock returns. As one of
market value information, dividend has positive significant influence on
stock returns. However, sales to asset (SALASS), all debt information
(TLTE, LTLTE, and TLTA), liquidity information (current ratio), and price
to earning ratio (PER), have insignificant effect on stock returns.

Key words : Efficient Market Hypothesis (EMH), Stock Return, Weak-

Form Market Efficiency

1. Introduction

Market efficiency means that the market price of a security represents

the markets consensus estimate of the value of that security. An
efficient financial market exists when security prices reflect all
available public information about the economy, about financial

1
markets, and about the specific company involved. The implication is
that market prices of individual securities adjust very rapidly to new
information (Van Horne, 1998).
All investors who hold security expect to increase the return in
the future. Many investors, including investment managers, believe
that they can select securities that will outperform the market.
Therefore, they need to use available public information to lead them
in their investment decisions, as Anderson et al (2005) states that in
investing the investors could use financial statements as their primary
decision-making tool. If the market is efficient, investor will purchase
the security at least at its current market price based on all available
public information. Therefore, investors who purchase the stock or any
other security interpret that their information as a higher appraisal
(Van Horne, 1998).
In the literature, such as in Corrado and Jordan (2000), the
question of whether a market is efficient is meaningful only relative to
some type of information. Three general types of information are
particularly interesting to define three forms of market efficiency are
weak-form efficient market, semi-strong-form efficient market, and
strong-form efficient market. In Indonesia Stock Exchange, we assume
that the stock market is efficient in weak-form as investors can not use
a time series of past stock price to discern a pattern of price changes
in predicting future stock return. Therefore, we are interested to
examine whether stock price changes is independent of past changes
or not, and to examine the extent to which market reacted with signal
on releasing public information in Indonesia Stock Exchange.
To answer these questions, we test the serial correlation between
previous and current stock price, and examine whether profitability,
liquidity, debt, and market value information have any impact on stock
returns, so that all these information can be used to estimate the
future stock returns. By using Ljung-Box Q-Test and regression analysis,
and collecting the data of firms in IDX over the period 1994-2005,
Ljung-Box Q-Test result has shown that the significant amount of lag
are 16, therefore there is autocorrelation between current price and
previous price. The interpretation of the result is that the market is not
efficient in weak-form, and it indicates that investor could use price
from one period to predict returns in later periods and make higher
profits. Regression result of testing the extent to which market reacted
with signal on releasing public information, have shown that ROA, ROE,
and dividend can predict the future movement of stock returns, while
SALASS, TLTE, LTLTE, TLTA, current ratio, and PER, can not be used to
estimate the stock returns.
The rest of the paper is divided into 5 sections. Section 2
explains the theoretical framework and also covers some results from
earlier studies. Section 3 discusses the hypotheses of the research.
Section 4 presents the methodology used for the study. Section 5

2
interprets the empirical results and the statistic results. Section 6
presents the conclusions respectively.

2. Literature Review

The term "efficient market" is introduced for the first time by Eugene
Fama (1965), in his paper titled Random Walks in Stock Market
Prices. He defined an efficient market as : a market where there are
large numbers of rational profit maximizers actively competing, with
each trying to predict future market values of individual securities, and
where important current information is almost freely available to all
participants. It implies that investors trying to use information to
predict future market values of securities.

Corrado and Jordan (2000) noted three general types of

information are particularly interesting to define three forms of market
efficiency are the following : (1) A weak-form efficient market is one in
which the information reflected in past prices and volume figures is of
no value in beating the market. If past prices and volume are of no use,
then technical analysis is of no use whatsoever. (2) In a semi-strong-
form efficient market publicly available information of any and all kinds
is of no use in beating the market. If a market is semi-strong-form
efficient, then the fundamental analysis techniques are use less. Past
prices and volume data are also publicly available information, so if a
market is semi-strong-form efficient, it is also weak-form efficient. (3)
Finally, in a strong-form efficient market no information of any kind,
public or private, is useful in beating the market. If a market is strong-
form efficient, it is clear that nonpublic inside information of many
types would enable us to earn essentially unlimited returns.
According to Fama (1965), weak-form market efficiency means
that the unanticipated return is not correlated with previous
unanticipated returns. Semi strong-form market efficiency means it is
not correlated with any publicly available information. Strong-form
market efficiency, indicates the unanticipated return is not correlated
with any information, be it publicly available or insider.
Based on the view of Spiegel and Stanton (2000), market
efficiency refers to the extent that market efficiency prices reflect all
available information. In their article, three primary forms of market
efficiency are (1) Weak-form efficiency exists if market prices
incorporate all past price information. (2) Semi-strong form efficiency
exists if market prices incorporate all publicly available information. (3)
Strong-form efficiency exists if market prices incorporate all

3
information (both public and private).
Many researchers have tested the weak-form market efficiency
hypothesis. Rindisbacher (2002) presented the evidence that in weak-
form, US market that contrarian strategies achieve abnormal returns
in the long run, while US market that momentum strategies achieve
abnormal returns in the short run. Brock, Lakonishok, and LeBaron
(1992) find that relatively simple technical trading rules would have
been successful in predicting changes in the Dow Jones Industrial
Average.
Rosenberg and Rudd (1982) found that the first order serial
correlation of daily return residual from the market model is small but
significantly negative. Gibbons and Hess (1981) reported the Monday
Effect of stock prices tended to go down on Mondays. This finding was
clearly inconsistent with the weak-form market efficiency. They also
noticed that the Monday Effect seemed to decrease over time.
Meanwhile, many researchers tested the semi-strong-form
market efficiency hypothesis. The study of Rindisbacher (2002)
presented the evidence that in semi-strong-form, public information is
reflected in the stock prices. The evidence is that markets react
quickly. Survey of market efficiency of Fama (1991) has focused on
testing informational efficiency. He reports a stronger evidence a
predictability in returns based both on lagged values of returns and
publicly available information.
The study of Roncati (2005) which has the objective to determine
whether a group of investors, is able to forecast the future security
price, using all information it wishes to employ, to increase returns on
the portfolio and consequently to beat the market. The sample consists
of the returns on the portfolios of 80 actively managed Swiss equity
funds and of 14 passively managed Swiss equity funds for which
monthly performance (or rate of return) information and detailed
information were available at Reuters and Lipper for the period 2001-
2005. The result of his work is that on average the active funds
managers are not able to predict the security prices well enough to
outperform the market and consequently the passive funds and
consequently the market seems to be efficient.
Researchers who have tested EMH in the strong-form are the
following. Penman (1982) found that insiders can achieve high return
by buying shares before the announcement and selling their shares
after the announcement. Rindisbacher (2002) found that corporate
insiders earn positive abnormal returns, and prices do not seem to

4
reflect all information. Morse (1980) found a grater trading than normal
a day before public announcement. Keown and Pinkerton (1981)
observed high abnormal return and trading volume prior to merger
announcement. Abdel-Khalik and Ajinkya (1982) discover high return a
week before analyst earning announcement.
Some of study results are inconsistent with EMH, such as the
study result of Ozmen (1997). He finds that future prices are
predictable by using past price movements, and because of this ISE is
not weak-form efficient. It is possible for professional investors who
carefully observed this trend to make extraordinarily high profit.
Sullivan, Timmermann, and White (1999) find that the apparent
historical ability of technical trading rules to generate excess returns.
Fama and French (1992) found that after controlling for firm size and
the variance of portfolio returns, stocks with low price-earnings ratios
outperform the market.
Several previous research review the issue of whether financial
ratios have the influence on stock return or not. For instance, in the
study of Martel and Padrn (2006), the methodology of event study has
been used for testing empirically if the share price in the Spanish Stock
Market reacts to the straight debt issue by companies that have
quoted in the Stock Exchange of Madrid over the period 1989-1998.
The obtained results show that the Spanish Stock Market reacts
positively and significantly to debt issue announcements. The market
response to the debt issue announcements has been positive and
significant for the companies with a policy of low dividends. On the
other hand, this relation has been positive but non-significant for
companies with high dividend payouts.
Hadi (2006) examines the market reaction to accounting
numbers release by using stock returns as the dependent variable and
dividends, net income on sale, return of equity, return on asset, debt
ratio, interest coverage, current ratio, and price/earning ratio as
independent variables. He used ordinary least square method (OLS) to
solve the regression equations, and all analysis is performed at pool
2000-2003. His study result shows that dividend, net income on sale
and ROA have impact on security returns, current ratio can be used an
estimate for future return, debt ratio coefficient is negative which carry
negative information to the market, and interest coverage can be used
to estimate for future returns.
An empirical study conducted by Karan (1996) using the Istanbul
Stock Exchange data, showed that there is PER effect on stock return.
Bhana (2002) observes a sample of 100 companies listed in
Johannesburg Stock Exchange (JSE), announcing special dividends over
the period 1975 1994. The result shows that share price reactions are
negatively related to dividend declaration frequency. Woolridge (1983)
has argued that one cannot infer that dividend increases convey
positive information about the firm by examining share prices alone.

5
 According to Beechey, Gruen, and Vickery (2000), in an efficient
market, publicly available information should already be reflected in
the asset price. In the stock market, such as, public information on
price-earnings ratios, cash flows or other measures of value should not
have implications for future share returns (unless these variables are
revealing information about the riskiness of the asset). Abeyratana et
al. (1993) found a significant abnormal return in relationship with firms
announcing cash dividends. Hadi (2005) found evidences from Kuwait
that market reactions of the release dividedness information.

3. Hypothesis

Based on the efficient market hypothesis and previous research

findings reviewed above, we hypothesize that :
H1 : There is a weak-form of market efficiency in IDX, as weak-form of
market efficiency hypothesis asserts that the current price fully
incorporates information contained in the past history of prices
only.
H2 : Profitability information, liquidity information, debt information,
and market value information have influence on stock return.

4. Research Methodology

4.1 Hypotheses Testing and Measurement of Variables

To test the hypothesis 1, we examine the serial correlation between the

current stock price and the stock price over a previous period,
following research methodology used by Rosenberg and Rudd (1982).
Meanwhile, for testing the hypothesis 2, we examine the effect of
profitability, liquidity, debt, and market-value information on stock
returns, by applying the methodology of research used by Hadi (2006),
but with appropriate modification.
The selection of variables and definitions are following Van Horne
(1998). The regression model of hypothesis 2 and definition of
variables used in the research are as follow :

STRET = a + b1*ROA + b2*ROE + b3*SALASS + b4*CURRAT+

b5*TLTE + b6*LTLTE + b7*TLTA + b8*PER + b9*DIV +

Where :

a. Profitability Information

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Stock Return or STRET is return for stockholders. Return on assets, or
the ROA is measured as net profits after taxes to total assets. Return
on Equity or ROE is measured as net profits after taxes minus preferred
stock dividend divided by shareholders equity. This ratio tells us the
earning power on shareholders book investment. Asset turnover ratio
is measured as total sales to total assets (SALASS). This ratio tells us
the relative efficiency with which the firm utilizes its resources in order
to generate output.

b. Liquidity Information

Liquidity ratio is used to judge a firms ability to meet short-term

obligations. From them, much insight can be obtained into the present
cash solvency of a company and its ability to remain solvent in the
event of adversities. One of the most general and most frequently used
of liquidity ratios is the current ratio (CURRAT) as measured by current
assets to current liabilities.

c. Debt Information

The debt-to-equity ratio is computed by simply dividing the total debt

of the firm (including current liabilities) by its shareholders equity
(TLTE). The long-term debt-to-equity ratio (LTLTE) is computed by
simply dividing the long-term debt of the firm by its shareholders
equity. Total debt to assets ratio (TLTA) is computed by dividing total
liabilities by its total Assets. Debt information is used to measure the
relative obligations of a company.

d. Market-Value Information

The price to earnings ratio (PER) of a company is simply share price

divided to earnings per share. This ratio is described as one measure of
relative value. The higher this ratio, the more the value of the stock
that is being ascribed to future earnings as opposed to present
earnings. The dividend (DIV) for a stock relates the annual dividend per
share.

4.2. Data Analysis

A. Ljung-Box Q-Test

Following the methodology in the study of Rosenberg and Rudd (1982),

we use serial correlation test to measure the association between two

7
elements of time series separated by a constant number of time
periods. The objective of this test is to examine the autocorrelation
between the current stock price and the stock price over previous
period. Hence, we employ Ljung-Box Q-Test to detect serial correlation
of the data 16th lag (Ghozali, 2002).

B. Regression Analysis

We employ regression technique and equation to measure the degree

of relationship between two or more variables in two different but
related ways. The model of the relationship has hypothesized, and the
objective of the analysis is to test whether or not profit information,
liquidity information, debt information, and market value information,
have influence on stock returns.
4.3. Data Description

We have collected the data of companies from the Indonesia Stock

Exchange 1(IDX), from the year 1994 to 2005. The sample size consists
of 77 companies and includes all sector companies of LQ 45 Index as
sample. The Index is one of Indonesias Stock Exchange Index, which
consists of 45 firms from all sectors.

5. Hypotheses Test Results

5.1. Ljung-Box Q-Test Result

For testing hypothesis 1, we examine whether IDX is efficient in weak-

form market efficiency or not. Therefore, we test the serial correlation
between current price and previous price of the stocks, by employing
the Ljung-Box Q-Test for analyzing serial correlation between variables.
The result of the test is presented in table 1 as follows.

Table 1 : Ljung-Box Q-Test Result

1 www.idx.co.id

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 Autocorrelations

Series: Current_price

Autocorrel Box-Ljung Statistic

a b
Lag ation Std.Error Value df Sig.
1 .275 .049 31.753 1 .000
2 .231 .049 54.150 2 .000
3 .193 .049 69.876 3 .000
4 .088 .049 73.142 4 .000
5 .048 .049 74.112 5 .000
6 .045 .049 74.988 6 .000
7 .006 .048 75.002 7 .000
8 -.029 .048 75.351 8 .000
9 -.051 .048 76.483 9 .000
10 -.050 .048 77.536 10 .000
11 -.046 .048 78.450 11 .000
12 -.021 .048 78.637 12 .000
13 -.012 .048 78.695 13 .000
14 -.013 .048 78.772 14 .000
15 -.013 .048 78.847 15 .000
16 .037 .048 79.428 16 .000
a. The underlying process assumed is independence (white
noise).
b. Based on the asymptotic chi-square approximation.

Ljung-Box Q-Test is one method that can be used to detect

autocorrelation. Autocorrelation arises if significant amount of lag is
more than two, whereas if significant amount of lag is less than two,
then there is no autocorrelation between variables (Ghozali, 2002).
Table 1 shows that sixteen lag is significant. Therefore, we conclude
that there is autocorrelation between current price and previous price.
The interpretation of the result is that the market is not efficient
in weak-form, and it indicates that investor could use price from one
period to predict returns in later periods and make higher profits.

5.2. Regression Results

The objective of testing hypothesis 2 is to examine whether

profitability, liquidity, debt, and market value information have
significant effect on stock return.

A. Regression Assumptions

Before analyzing regression coefficients of variables, we must first

make several assumptions about the population of the research. They
represent an idealization of reality, and as such, they are never likely

9
to be entirely satisfied for the population in any real study (Van Horne,
1998). A good regression model should not has the following
assumptions.

1. Multicollinearity

Multicollinearity implies that for some set of explanatory variables,

there is an exact linear relationship in the population between the
means of the response variable and the values of the explanatory
variables (Van Horne, 1998). The goal of the multicollinearity test is to
analyze whether there is correlation between independent variables.
Multicollinearity in the regression model can be detected such as by
testing the R2 value and/or analyzing the correlation matrix (Ghozali,
2002).

Table 2 : Model Summary

Model Summaryb

Adjusted Std. Error of Durbin-

Model R R Square R Square the Estimate Watson
1 .439a .193 .149 10414.00632 2.482
a. Predictors: (Constant), DIV, SALASS, PER, TLTE, ROE, CURRAT, LTLTE,
TLTA, ROA
b. Dependent Variable: STRET

Table 2 shows the value of R 2 that has generated by an empirical

regression model estimation. It values is 0.193 (less than 0.90).
We also see from table 2 that the Adjusted R-squared value of
profitability information, liquidity information, debt information, and
market value information as predictors for stock return is 0.149. These
provide one evidence that only 14.9% of the movement of the stock
return could be explained by the existence of these information.
Therefore there is no multicolinearity in the regression model.

Table 3 : Correlations

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 Correlations

ROA ROE SALASS CURRAT TLTE LTLTE TLTA PER DIV

ROA Pearson Correlation 1 .317** -.321** .185** .048 .101* .027 -.091* .436**
Sig. (2-tailed) .000 .000 .000 .226 .010 .490 .046 .000
N 641 640 623 518 641 641 641 483 290
ROE Pearson Correlation .317** 1 -.137** .020 .237** .254** .148** -.069 .341**
Sig. (2-tailed) .000 .001 .652 .000 .000 .000 .128 .000
N 640 643 622 520 643 643 640 483 290
SALASS Pearson Correlation -.321** -.137** 1 -.320** -.006 -.010 -.054 -.027 -.044
Sig. (2-tailed) .000 .001 .000 .872 .810 .177 .560 .462
N 623 622 623 509 623 623 623 468 282
CURRAT Pearson Correlation .185** .020 -.320** 1 -.008 .008 -.103* .001 .186**
Sig. (2-tailed) .000 .652 .000 .849 .851 .019 .984 .004
N 518 520 509 521 521 521 518 390 244
TLTE Pearson Correlation .048 .237** -.006 -.008 1 .951** .097* -.017 -.115
Sig. (2-tailed) .226 .000 .872 .849 .000 .014 .716 .051
N 641 643 623 521 644 644 641 484 290
LTLTE Pearson Correlation .101* .254** -.010 .008 .951** 1 .076 -.016 -.175**
Sig. (2-tailed) .010 .000 .810 .851 .000 .054 .721 .003
N 641 643 623 521 644 644 641 484 290
TLTA Pearson Correlation .027 .148** -.054 -.103* .097* .076 1 -.061 -.214**
Sig. (2-tailed) .490 .000 .177 .019 .014 .054 .181 .000
N 641 640 623 518 641 641 641 483 290
PER Pearson Correlation -.091* -.069 -.027 .001 -.017 -.016 -.061 1 -.120
Sig. (2-tailed) .046 .128 .560 .984 .716 .721 .181 .079
N 483 483 468 390 484 484 483 505 217
DIV Pearson Correlation .436** .341** -.044 .186** -.115 -.175** -.214** -.120 1
Sig. (2-tailed) .000 .000 .462 .004 .051 .003 .000 .079
N 290 290 282 244 290 290 290 217 290
**. Correlation is significant at the 0.01 level (2-tailed).
*. Correlation is significant at the 0.05 level (2-tailed).

The correlations matrix above shows that there is only one quite high
correlation value (more than 0.90), that is the correlation between
independent variables of TLTE and LTLTE. Meanwhile, the other
correlation values are less than 0.90. This is an indication that
multicollinearity is not exist in the regression model.

2. Autocorrelation

Autocorrelation requires probabilistic independence of the errors. This

assumption means that information on some of the errors provides no
information on other errors. For time series data this assumption is
often violated. This is because of a property called autocorrelation (Van
Horne, 1998).
Test of autocorrelation aims to examine whether in a linear
regression model has correlation between gadfly errors in the period t
with an error in the period t-1 (before). One of the method that can be

11
 used to detect autocorrelation is the Durbin Watson (DW). Table 2
shows that the DW value of 2.482 which means that there is no
autocorrelation in regression model.

3. Heteroscedasticity

This assumption concerns variation around the population regression

line. Specifically, it states that the variation of the Ys about the

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regression line is the same, regardless of the values of the Xs (Van
Horne, 1998).
Test of heteroscedasticity aims to interpret whether the
regression model has the differences residual variance from one

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observation to another observation (Ghozali, 2002). If the residual
variance from one observation to another observation is the same, it is
called homoscedasticity.

Figure 1 : Scatterplot

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The graphic of scatterplot (figure 1) shows that the dots have not
established a specific pattern. Some of the dots located adjacent but
some other dots spread above and below the numbers of 0 at the axis
Y. Thus, that the data in the graphic exhibit homoscedasticity.

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 4. Normally Distributed

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The assumption states that the errors are normally distributed.
We can check this by forming a histogram of the residuals. If the
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symmetric and bell-shaped. But if there is an obvious skewness, too
many residuals more than, say, two standard deviations from the
mean, or some other non-normal property, then this indicates a
violation of the assumption (Van Horne, 1998).

Figure 2 : Histogram

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From the graphics of histogram (figure 2) and normal P-P plot (figure
3), we concluded that the histogram gives the normally pattern of
distribution. Meanwhile, the graphic of normal P-P plot shows that the
dots spread around the diagonal line, and the spreading follows the
diagonal line. Both of graphics show that the data meets reasonable
assumption of normality.
Based on the results of assumptions of population described
above, the regression model does not has the assumptions of
heteroscedasticity, multicollinearity, autocorrelation, and the data is
normally distributed. Thus, our regression model is appropriate to use
for testing the hypothesis 2.

B. Regression Coefficients

Table 4 presents the regression results to analyze the influence of

profitability, liquidity, debt, and market value information on stock
returns.

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Table 4 : Regression Coefficients

Coefficientsa

Unstandardized Standardized
Coefficients Coefficients Collinearity Statistics
Model B Std. Error Beta t Sig. Tolerance VIF
1 (Constant) -983.524 3527.500 -.279 .781
ROA -706.828 199.253 -.726 -3.547 .001 .115 8.667
ROE 219.257 98.192 .423 2.233 .027 .135 7.416
SALASS 279.811 1933.777 .013 .145 .885 .605 1.652
CURRAT .925 9.582 .010 .097 .923 .487 2.055
TLTE -23.667 1000.427 -.003 -.024 .981 .347 2.885
LTLTE -1481.314 1715.732 -.093 -.863 .389 .415 2.410
TLTA 2563.545 7145.386 .043 .359 .720 .332 3.016
PER 44.006 56.414 .056 .780 .436 .946 1.058
DIV 18.146 3.255 .448 5.574 .000 .747 1.338
a. Dependent Variable: STRET

Table 4 shows the following results :

Profitability information on stock return

ROA as measured by the return on assets, has negative significant

regression coefficient on stock return, with 0.001 level of significance
and -3.547 t-value. This result suggests that firms with high ROA would
tend to create low return of stock to their stockholders. ROE has
positive significant regression coefficient on stock return, with 0.027
significance level and 2.233 t-value. This result implies that ROE can be
used for estimating the future stock returns. SALASS has insignificant
positive regression coefficient on stock return, with 0.885 level of
significance and 0.145 t-value. This result describes that SALASS ratio
can not be used to predict the future stock returns.

Liquidity information on stock return

Current ratio has insignificant positive influence on stock returns with

0.923 level of significance and 0.097 t-value. This result implies that
liquidity information do not affect stock returns, hence it can not be
used to predict the future returns.

Debt information on stock return

15
TLTE and LTLTE have negative but not significant effects on stock
returns. However, TLTA has positive but not significant influence on
stock returns. These results suggest that debt information can not be
applied for estimating the future stock returns.

Market value information on stock return

PER as measured by price to earning ratio, has positive but not

significant regression coefficient on stock return, with 0.436 level of
significance and 0.780 t-value. This result suggests that firms with high
PER would tend to create high return of stock even though
insignificantly. Dividend as defined dividend per share for shareholders,
has positive significant regression coefficient on stock return, with
0.000 level of significance and 5.574 t-value. This result describes that
firms with high dividend payment would tend to create high return of
stock for their stockholders. Therefore, dividend can be applied to
predict the future stock returns.

6. Conclusion

After obtaining the Ljung-Box Q-Test and regression results for

examining whether Indonesia Stock Market is efficient in weak-form, by
using the data of LQ 45 Index within the period 1994-2005, we can
draw the conclusion. Firstly, the significant amount of lag are 16,
therefore there is autocorrelation between current price and previous
price. It implies that market is not efficient in weak-form as one could
use price from one period to predict returns in later periods and earn
extraordinarily high return by using pattern of price change.
Secondly, regression result of testing the extent to which market
reacted with signal on releasing public information, have shown that
profitability information (ROA) has negative significant effect on stock
returns, while ROE has positive significant effect on stock returns.
Meanwhile, as one of market value information, dividend has positive
significant influence on stock returns. However, profitability
information (SALASS), debt information (TLTE, LTLTE, and TLTA),
liquidity information (CURRAT), and market value information (PER),
have not significant effect on stock returns. These results suggest that
debt information and liquidity information can not be used to estimate
the stock returns, while ROA, ROE, and dividend can predict the future
movement of stock returns.
Based on these results, there is an indication that Indonesia
Stock Exchange is not efficient in weak-form. Our results are
inconsistent with Efficient Market Hypothesis, as it states that, it is not

16
possible to earn extraordinarily high return in any form efficient market
by using pattern of price change, and also to predict future stock
returns. Efficient market prevents investors to use information because
prices have already adjusted to take that information into account. The
efficient markets hypothesis also suggests that profiting from
predicting price movements is very difficult and unlikely as security
prices adjust before an investor has time to trade on and profit from a
new information. Therefore, there is no reason to believe that prices
are too high or too low.
Our results are also inconsistent with Malkiel (2003) who defined
that markets are efficient when markets do not allow investors to earn
above-average returns without accepting above-average risks, and the
study result of Roncati (2005) which states that on average the active
funds managers are not able to predict the security prices well enough
to outperform the market.
Thus, the results imply that even though the evidence suggests
that stock returns are predictable, in ways that conflict with the
efficient market hypothesis, the degree of predictability is generally
small compared to the high variability of returns.

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Appendix

1. Ljung-Box Q-Test Results

19
 Model Description
Model Name MOD_1
Series Name 1 Previous_price
2
Current_price

Transformation None
Non-Seasonal Differencing
0
Seasonal Differencing 0
Length of Seasonal Period
No periodicity
Maximum Number of Lags
16
Process Assumed for Calculating the Standard
Errors of the Autocorrelations a
Independence(white noise)

Display and Plot All lags

Applying the model specifications from MOD_1
a. Not applicable for calculating the standard errors of the partial
autocorrelations.

Case Processing Summary

Previous_
price Current_price
Series Length 423 423
Number of Missing User-Missing 0 0
Values System-Missing a a
6 6

Number of Valid Values 417 417

Number of Computable First Lags
416 416

a. Some of the missing values are imbedded within the series.

Previous Stock Price

20
 Autocorre la tions

Series: Previous_price

Autocorrel Box-Ljung Statistic

a b
Lag ation Std.Error Value df Sig.
1 .402 .049 67.807 1 .000
2 .215 .049 87.211 2 .000
3 .217 .049 107.107 3 .000
4 .112 .049 112.457 4 .000
5 .041 .049 113.181 5 .000
6 .015 .049 113.275 6 .000
7 -.004 .048 113.281 7 .000
8 -.038 .048 113.890 8 .000
9 -.037 .048 114.467 9 .000
10 -.044 .048 115.313 10 .000

P
r
e
v
i
o
u
s
_p
r
i
c
e
11 -.048 .048 116.315 11 .000
12 -.032 .048 116.751 12 .000
13 -.021 .048 116.947 13 .000
14 -.020 .048 117.113 14 .000
15 -.005 .048 117.124 15 .000
16 -.005 .048 117.136 16 .000
a. The underlying process assumed is independence (white

C
o
e
f
i
ce
n
t
noise).

1
.00 U
p
rC
o
fi
d
e
n
cL
i
mt
b. Based on the asymptotic chi-square approximation.

.5 L
w
i
m
t
C
A

0
.-0
F

.-15
.0123456L
a
g
N
u
m
9b
7
8e
r11213141516
1
0
21
 Partial Autocorrelations

Series: Previous_price
Partial
Autocorrel
Lag ation Std.Error
1 .402 .049
2 .063 .049
3 .133 .049
4 -.029 .049
5 -.028 .049
6 -.023 .049
7 -.011 .049
8 -.034 .049
9 -.006 .049

P
re
v
io
u
s
_
p
ric
eC
10 -.022 .049
11 -.012 .049
12 .004 .049
13 .003 .049
14 -.003 .049
15 .009 .049

.010 oe
fL
iim
cen
ttfid
16 -.007 .049

.0 5 U
prw
C o e
n
c
L
im
t
C
artilA
F

.-0
P

.-15
.01
2
34
5
6L
a
g
N
u
m
7
8
9b
e
r11213141516
1
0
22
Current Stock Price

Autocorrelations

Series: Current_price

Autocorrel Box-Ljung Statistic

a b
Lag ation Std.Error Value df Sig.
1 .275 .049 31.753 1 .000
2 .231 .049 54.150 2 .000
3 .193 .049 69.876 3 .000
4 .088 .049 73.142 4 .000
5 .048 .049 74.112 5 .000
6 .045 .049 74.988 6 .000
7 .006 .048 75.002 7 .000
8 -.029 .048 75.351 8 .000
9 -.051 .048 76.483 9 .000
10 -.050 .048 77.536 10 .000
11 -.046 .048 78.450 11 .000

C
u
re
n
t_
p
ric
eC
12 -.021 .048 78.637 12 .000
13 -.012 .048 78.695 13 .000
14 -.013 .048 78.772 14 .000
15 -.013 .048 78.847 15 .000
16 .037 .048 79.428 16 .000
a. The underlying process assumed is independence (white
noise).

.010 oe
fL
iim
cen
ttfid
b. Based on the asymptotic chi-square approximation.

.0 5 U
prw
C o e
n
c
L
im
t
C
A

.-0
F

.-15
.01
2
34
5
6L
a
g
N
u
m
7
8
9b
e
r11213141516
1
0
23
 Partial Autocorrelations

Series: Current_price
Partial
Autocorrel
Lag ation Std.Error
1 .275 .049
2 .168 .049
3 .105 .049
4 -.017 .049
5 -.022 .049
6 .011 .049
7 -.017 .049
8 -.040 .049
9

C
u
re
n
t_
p
ric
eC
-.045 .049
10 -.018 .049
11 -.006 .049
12 .018 .049
13 .011 .049
14 -.003 .049
15 -.008 .049

.010 oe
fL
iim
cen
ttfid
16

U
prw
C o e
n
cL
im
t
.048 .049

.0 5
C
artilA
F

.-0
P

.-15
.01
2
34
5
6L
a
g
N
u
m
7
8
9b
e
r11213141516
1
0
24
2. Regression Results

De scriptive Sta tistics

Mean Std. Deviation N

STRET 846.2160 11291.34482 177
ROA 8.2371 11.59823 177
ROE 16.1564 21.77084 177
SALASS .3710 .52175 177
CURRAT 98.8537 117.44746 177
TLTE 1.3092 1.33274 177
LTLTE .6115 .71032 177
TLTA .4801 .19080 177
PER 14.8740 14.30945 177
DIV 163.4476 278.95534 177

Note: Stock return (STRET) is return for shareholders. Return on equity (ROE) is
measured as net profits after taxes minus preferred stock dividend divided by
shareholders equity. Return on Assets (ROA) is measured as net profits after taxes to
total assets. Asset turnover ratio is measured as total sales to total assets (SALASS).
Current ratio (CURRAT) is measured as current assets to current liabilities. Debt-to-
equity ratio is computed by simply dividing the total debt of the firm (including
current liabilities) by its shareholders equity (TLTE). Long-term debt-to-equity ratio
(LTLTE) is computed by dividing the long-term debt of the firm by its shareholders
equity. Total debt to assets ratio (TLTA) is computed by dividing total liabilities by its
total assets. Price to earnings ratio (PER) of a company is simply share price divided
to earnings per share. Dividend (DIV) for a stock relates the annual dividend per
share.

b
Variables Entered/Removed

Variables Variables
Model Entered Removed Method
1 DIV,
SALASS,
PER,
TLTE,
. Enter
ROE,
CURRAT,
LTLTE, a
TLTA, ROA
a. All requested variables entered.
b. Dependent Variable: STRET

25
 ANOVAb

Sum of
Model Squares df Mean Square F Sig.
1 Regression 4E+009 9 480846800.2 4.434 .000a
Residual 2E+010 167 108451527.7
Total 2E+010 176
a. Predictors: (Constant), DIV, SALASS, PER, TLTE, ROE, CURRAT, LTLTE, TLTA,
ROA
b. Dependent Variable: STRET

Collinearity Diagnosticsa

Condition Variance Proportions

Model Dimension Eigenvalue Index (Constant) ROA ROE SALASS CURRAT TLTE LTLTE TLTA PER DIV
1 1 5.507 1.000 .00 .00 .00 .00 .00 .00 .00 .00 .01 .01
2 1.915 1.696 .00 .01 .01 .03 .02 .01 .01 .00 .01 .02
3 .930 2.433 .00 .00 .00 .14 .01 .02 .05 .00 .03 .13
4 .606 3.015 .00 .00 .00 .01 .06 .02 .02 .00 .31 .29
5 .391 3.755 .00 .02 .02 .32 .00 .00 .01 .00 .21 .44
6 .308 4.227 .01 .02 .04 .02 .48 .00 .00 .00 .25 .01
7 .152 6.020 .00 .00 .00 .04 .00 .47 .82 .01 .02 .00
8 .121 6.744 .12 .00 .00 .32 .23 .25 .02 .10 .15 .02
9 .046 10.959 .04 .80 .76 .04 .09 .04 .05 .03 .01 .07
10 .024 15.053 .82 .15 .16 .07 .11 .18 .01 .86 .01 .01
a. Dependent Variable: STRET

Residuals Statisticsa

Minimum Maximum Mean Std. Deviation N

Predicted Value -15956.4 34740.98 846.2160 4958.70516 177
Std. Predicted Value -3.389 6.835 .000 1.000 177
Standard Error of
1112.387 8576.386 2215.074 1107.967 177
Predicted Value
Adjusted Predicted Value -19525.6 18838.61 625.7817 4674.23250 177
Residual -100927 52759.02 .00000 10144.24521 177
Std. Residual -9.691 5.066 .000 .974 177
Stud. Residual -10.267 6.942 .009 1.078 177
Deleted Residual -113276 99065.41 220.43423 12751.69307 177
Stud. Deleted Residual -16.857 8.206 -.021 1.514 177
Mahal. Distance 1.014 118.373 8.949 13.651 177
Cook's Distance .000 4.230 .034 .332 177
Centered Leverage Value .006 .673 .051 .078 177
a. Dependent Variable: STRET

26
27