Document Type : Original Article


1 Islamic Azad University, UAE Branch, Dubai, UAE.

2 Department of Planning & Management, Management Study and Technology Development Center of Tarbiat Modares University, Tehran, Iran.

3 Tehran University, Tehran, Iran.

4 Islamic Azad University, South Tehran Branch, Tehran, Iran.


Prediction of stock returns has always been one of the most important issues in finance. Investors have attracted to use of Fama-French Five-Factor Model (FFFFM) as one of the powerful methods for pricing financial assets and predicting the stock returns. This research investigates the predictability of stock returns by including some important firms features namely cash holdings, dividend rate, and free cash flow to equity to FFFFM. Statistical samples consist of 75 companies listed on the Tehran Stock Exchange (TSE) during 2003-2017. The results of panel data test indicate positive significant effects of all variables in FFFFM (i.e. book to market value ratio, company size, growth opportunity, profitability, and investment) as well as newly added firms feature variables (cash holding, dividend rate, and free cash flow to equity). However, the investment has a negative impact on the returns due to the initial estimate of primary FFFFM. In addition, the results indicate that the inclusion of firms feature variables significantly improve the predictive power of stock returns. Finally, by comparing the predictive power of the models, the best prediction model is determined.


Aharoni, G., Grundy, B., and Zeng, Q., (2013). "Stock returns and the Miller Modigliani valuation formula: Revisiting the Fama French Analysis", Journal of Financial Economics, Vol. 110, No. 2, pp. 347-357. 
Cakici, N., (2015). The Five-factor Fama-French Model: International Evidence. Available at SSRN: or 10.2139/ ssrn.2601662. 
Fama, E.F., and French, K.R., (1993). "Common risk factors in the returns on stocks and bonds", Journal of Financial Economics, Vol. 33, No. 1, pp. 3–56. 
Fama, E., and French, K., (2015). "A Five-factor asset-pricing model", Journal of Financial Economic, Vol. 116, No. 1, pp. 1-22.
Fama, E.F., and French, K.R., (2016). "Dissecting anomalies with a five-factor model", Review of Financial Studies, Vol. 29, No. 1, pp. 69-103. 
Fama, E.F., and French, K.R., (2016b). International tests of a five-factor model, manuscript, Tuck School of Business, Dartmouth College.
Hausman, J.A. (1978). "Specification tests in econometrics", Econometrica, Vol. 46, No. 6, pp. 1251–1271. 
Lintner, J., (1965). "The valuation of risk assets and the selection of risky investment in stock portfolios and capital budgets", The Review of Economics and Statistics, Vol. 47, No. 1, pp. 13-37. 
Maxim, Caudia A., (2015). "The evaluation of CAPM, Fama-French and APT models on the Romanian capital market", Applied Financial Research, pp. 1-10. 
Miller M.H., and Modigliani, F., (1961). "Dividend policy, growth, and the valuation of shares", The Journal of Business, Vol. 34, No. 4, pp. 411-4. 
Novy, R., Marx, L., and Alan S., (2013). "The other side of value: The gross profitability premium", Journal of Financial Economics, Vol. 108, No. 1, pp. 1-28.
Racicot, F., and Theoret, R., (2015). "The q-factor model and the redundancy of the value factor: An application to hedge fund: A portfolio manager and investor’s perspective", Alternative Investment Analyst Review (CAIA), Vol. 3, No. 4, pp. 52–64.
Sharpe, W.F., (1964). "Capital asset prices: A theory of market equilibrium under conditions of risk", Journal of Finance, Vol. 19, No. 3, pp. 425-42. 
Treynor, J. L., (1962). Toward a theory of market value of risky assets. (Unpublished manuscript). Final version in Asset Pricing and Portfolio Performance (pp. 15-22), 1999, Robert A. Korajczyk (Ed.). London: Risk Books.