Do Financial Indicators, R&D And CEO Affect The American and European Stock Markets?
Factors from economics, finance, technology and innovation areas are most likely to affect stock market prices, therefore, it is very important to investigate the potential risk factors that could affect these markets, using innovative method – artificial neural network (ANN). The main goal of this paper is to investigate the impact between corporate financial indicators, CEO compensation, R&D investment and stock market and predict the trend of stock prices by these variables in USA and Europe. ANN provides a new way to optimize stock trading algorithms for an effective algorithmic trading strategy, involving different variables. Companies from Standard and Poor's 500 Index (SPX) and STOXX Europe 600 Index (SXXP)in total of 1100 were selected for the investigation, using Bloomberg professional terminal. Revenue, net income, sustainable growth rate, EBITDA, equity, short and long term debt, return on assets and on common equity, assets, liabilities and current liabilities, financial leverage, number of employees, gross and operating profit were selected as important financial indicators of companies. The annual time horizon was selected from 1999 to 2017 for the algorithm training of which 30% randomly has been assigned for the model testing and validation. The results of the investigation revealed that the financial results of companies uniquely influence the trend of prices in both stock markets. Financial leverage, EBITDA, sustainable growth rate, operating and gross profit as most significant financial factors, in particular, have a strong impact on both stock markets. However, CEO compensation and R&D investment have a more potent effect on USA stock market than on Europe’s stock market. Thus, if CEO compensation and R&D investment would increase in Europe, this stock market will have a strong growth potential. Otherwise, the SPX index price is six times higher than the SXXP index price and if CEO compensation and R&D investment will continue to grow in USA, while in Europe investment in innovation and financial incentives for top executives will stagnate, there is only a little chance that the European stock market will overtake to stock market of USA.
Keywords- Stock Markets, Financial Risk Factors, R&D Investments, CEO Compensation, Artificial Neural Network.