The Relationship between Free Float Stock and Stock Price Using Approach of Raising Capital in Capita Market

Transcription

1 The Relationship between Free Float Stock and Stock Price Using Approach of Raising Capital in Capita Market Amir ossein Afraz, * Master of Executive Management, Department of Management, Khomein Branch, Islamic Azad university, Khomein, Iran ABSTRACT It is long term that high price made some interests. Companies have strong incentives to limit investors highly and prices are channeled towards their foundations. The subject of this study is to investigate the relationship between free float and price using capital increasing approach. For this purpose, 27 qualified companies of the research are selected for 2 quarters since the beginning of 22 to the end of 25. In this study, free float is as an independent variable and price and dividend and return in the time between the approval and payment of dividend and return after dividend payment are as dependent variable. To test the hypotheses, statistical technique of multivariate regression is used. Obtained results from this study show that according to this case that there is significant relationship between dividend rate and return after dividend payment, so there is also a relationship between free float and price, it means that when floating the is low, price goes up, and when floating of is high, so price decreases, in other words, when float is published, price goes down. Other two sub-hypotheses which show a relation between dividend rate and float and dividend rate and return in the time between the approval and payment of dividend, the research results show that there is a relationship among them. KEY WORDS Stock, Price, Approach, Raising, Capital, Market I INTRODUCTION n our country, changes I recent years in the economy made significant changes on financing the companies and these events cause to increase required capital in companies. In this regard the Exchange can be a place to collect capital for doing capital- intensive and macro projects. One of the most important factors influencing the decision- making process is to collect related data. Decision makers need *Corresponding Author: Amir ossein Afraz r: Amirhossein.afraz@tse.ir Telephone Number r: various information which may be subjective objective, interoffice and outside the organization. So some information may be based on prices or past events and others are based on expectations of prices and future events. Developments in prices of companies on Stock Exchange is relatively complex, which is affected by different political, economic, psychological factors. Among the factors affecting on a company s price trend, are signs and symptoms which are reflected in different data and forecasts of that company and are available to shareholders and investors. Among the various information published, announcing the free float rate is a significant factor for decision making by investors about buying, selling or holding. Related news about free float of each company can changes price and trading volume as new information concerning the status of listed companies in Tehran Stock Exchange, if they have effective information content. STATEMENT OF PROBLEM AND RESEARC QUESTIONS Can companies increase their price by limiting the ability of investors to trade? Do prices can deviate from the foundations or the must be maintained for different periods? It is long term that high price made some interests. Companies have strong incentives to limit investors highly and prices are channeled towards their foundations? This study investigates this subject that do the companies can influence price through decreasing floating. Reducing floating is investigated by this issue that first the companies allow only a small part of is traded by public. So in this study, the manipulating relationship of floating and price is investigated. Manipulating is a conscious behavior and pre-designed in order to lure the investors for artificially controlling and influencing but in this study manipulating the floating is that manipulating the floating is occurred when on company limits some available shares to trade. In other words, because manipulating relationship of floating and price in this study is investigated using dividend, i.e.in the date between the approval of dividend and payment to the investors, investors don t 35

2 allow to trade these shares. So far, no research has been done in this regard in Iran. Research variables include free float, dividend rate, return and price. Free float concept is a that is expected to be traded in the near future, it means that if a proper price is adopted, we can presented this to trade. Profit sharing is called dividend by distributing company s between shareholders. Although profit sharing almost is in cash but if the company does not have a good liquidity condition and or it has needed cash to finance its operational development, it may issue new shares for shareholders instead of cash. For example, if a company has and its dividend rate is % (i.e. share are giving share), its raising will be and its total will be. Return is investment return of investors and in fact, investors are always seeking to obtain an appropriate return from their investment and they are always looking for information that could affect their investment return. RESEARC BACKGROUND A research has been done on manipulating the floating of and their price in Japan. This research has been done in May 25 by Rabin green wood. The model which is presented in this study is investigated using dividend rate and return in the time between the approval and payment of dividend and return after data of dividend payment. The obtained results of this study are that when floating the is low, price goes up, and when floating of is high, so price decreases, in other words, when float is published, price goes down. Also, the relationship between dividend rate and return in the time between the approval and dividend payment and the relationship between dividend rate and return after date of dividend payment are investigated. The obtained results show that return in the time among the approval and payment of dividend with dividend rate have positive correlation and return after date of dividend payment with dividend rate have negative correlation. In Iran, no research has been done in this regard. In international research, a research is found in chines Exchange about effective factors on return rate in which the effect of float on return is referred. In the researches that are conducted in field of float, mainly the effect of floating on indices and liquidity of market are also investigated. In a research that has been done by kalok chan and et.al. Entitled float and liquidity of market, the relationship of that and liquidity of market is investigated after government intervention in ong Kong Stock market and they concluded that government intervention in market causes to decrease float and as a result it causes to decrease micro- trading volume and to increase stagnant liquidity in the market (Chan,Kalok,Yue-Cheong Chan and Wai- Ming Fong,22). Fenghue wang and yexia xu in a research, entitled what determines return in china which is conducted in chines market in 24, tried to find the effective factor on return rate.by doing this research, they can provide one model with Effective factors on return rate that includes market, size and float. This model can justify 9% change in return of portfolio that shows % improvement towards a simple model of market. Abdeh tabrizi in a research, entitled free float and determining the based volume, investigated Iran market index and stated that float must be considered in the index calculation, but due to the difficulty in calculating the float, for better adjusting the index, we use based volume as minimum number of trading which form price change in the index. Namazi and Rostami in research, entitled investigating the relation of financial ratios and return rate of companies listed in Tehran Stock Exchange, considered financial ratio as an independent variable and return rate of companies as dependent variable. Analyzing and investigating the data of companies in showed that there is significant relationship between all financial ratio and return rate. Mehrani and Mehrani in a research, entitled investigating the relationship between profitability with return, concluded that there is significant relation between variables such as assets rerun, equity interest return and net profit margin before the tax with return. Also the results show that asset return is more effective than other variables in predicting return. Nasoti fard in a research, entitled the percentage of low float and manipulating the prices, stated that in the companies that have low free float, supply and demand will not be determinants and price will be changed based on the intention and shareholders demand. Bagherzadeh (25), in the investigation of effective factors on return in Tehran Stock Exchange during , concluded that there is a positive linear relationship between systematic risk and return. Also, size of company with return has significant relationship. There is significant negative relation between two variables of book to market ratio and earnings ratio to price with return. Noravesh and eydari in a research, entitled management performance evaluation of companies listed in Tehran Stock Exchange with CVA model and investigating that model with return showed that there is significant relation between cash value added and annual return. RESEARC OBJECTIVES It is long term that high price made some interests. Companies have strong incentives to limit investors highly and prices are channeled towards their foundations. In this research, this issue is investigated by using floating manipulation. As companies manipulate floating the by limiting some available shares to trade. This opinion, which floating can be manipulated to influence price, is used in different groups. As in public supply of initial shares in, many companies just supply a small part of their 36

3 shares to the public. When the companies limit their supply, the investors are forced to sell their new shares after the date of dividend. So the main purpose of this study is to investigate the relationship between manipulating floating and price that it is investigated using dividend rate and return in the time among dividend approval and its payment and return after the time of dividend payment. The application of this study is that investors and campiness can investigate the price changes using the relationship between floating manipulation and price by using dividend return variables in the time between dividend approval and its payment and return after the date of dividend payment and they can predict the future changes by using the past changes in price. The importance of research: According to the importance of private sector in capital market and reducing the role of ownership in shares of companies in Stock Exchange, float can lead to increase trade volume and to decrease stagnant liquidity amount of market as a financial leverage as todays many Stock Exchanges in the world remove the companies from the list of their exchange index which are less than 25% of its float. In the regard of identifying the effective factors on the return and price, the results of various researches show that the factors like macroeconomic policies of the government, politic issues inside and outside of the country, inflation and external factors like management quality, efficiency of company operations, financial structure are effective on return of the company and also the factors such as company s budget and earnings per share prediction, special situation of industry, monetary and financial policies of the country, profit sharing, credit and company background and supply and demand are effective on price and however, a little researches have been done about the effect of float on price because it is a new subject. In this study, the relationship between free float and price of companies is investigated using capital raising approach.in Iran, there is no any research about this case. So, because it is a new subject and there is no investigation about free float and price, this research has been conducted. RESEARC QUESTION AND YPOTESES This research is seeking to investigate this issue that whether there is a positive and significant relationship between float of accepted companies in capital market by changing in their price. To answer this question, the main hypothesis and subhypothesis are formulated as follows: Main hypothesis: The floating shares of companies listed in capital market with changes in their price has significant relationship. Sub-hypothesis:. There is significant relationship between dividends for companies with float of companies in capital market. 2. There is significant relationship between return of companies in the time between the approval of dividend and paying dividend with rate of dividend in capital market. 3. There is significant relationship between return of companies after date of dividend payment with dividend capital market. RESEARC METOD Method of this research is correlation and by using multivariate regression model. By using this method, the relationship is found between dependent variable and a few independent variables. Spatial territory of research will be all companies in Tehran capital market and its temporal period is considered from the beginning of 25 until end of 28. This research is applicable and library-based in terms of collecting research data. Data required for calculating return include price, amount of capital raising and its time, dividend rate and its time, and also data related to float rate of dividend are collected from archive of Exchange organization and its site. RESEARC VARIABLE This research has one independent variable and 4 dependent variables. Independent variable and way of calculation: Independent variable is free float which free float is a percent of a company capital and has been a variable for investors for trading on the market and it is tradable without any restriction. The free float is equal to the number of shares from total shares of company minus non-tradable shares. This definition is presented for the first time by global index of salmon smith Barney in 989. Free float for companies in Tehran Stock Exchange is calculated and announced every three months to the public: (research center of Iranian capital market, the central organization of Tehran Stock Exchange). A) Shareholders are considered as strategic shareholder with more ownership and equal to 5 percent. B) If the total family shareholders, cohort and crossownership is more than 5 percent, it is considered as non-floating in calculations. C) Employees more than 5%is considered as strategic (research center of Iranian capital market, the central organization of Tehran Stock Exchange). Because of unavailability of the necessary information to 37

4 calculate the float in Iranian market, to collect data on float and testing hypotheses, information about floating is used which are calculated from the second quarter of 24 onwards by Stock Exchange organization. Dependent variable and way of its calculation: In this research, the return is dependent variable and the means of return is a set of benefits that during the year is belonged to the, and we can consider this towards first price or latest price and return rate of total is calculated. Investment return in normal in this research and in one certain period is calculated as follows in respect to the first and last period price and interests gained from ownership and increasing capital in company (raee and talangi, 24). Rit: return ratio in company I in the period t Pit: price of company I in period t Ait: ratio of capital raising to company I in period t Dit: dividend of in company I in period t M: cash input of shareholders per each share. Another dependent variable in the study is rate of dividend. Profit sharing is called dividend among shareholders by distributing of companies. Although profit sharing almost is done in cash but if the company has not good liquidity condition or it needs cash for finance its operational development, it is possible that new will be issued rather than cash. For example, if a company has and its dividend rate is % (i.e. share are gave share), its raising will be and its total will be. The last dependent variable is price of company. STUDYING PERIOD AND STATISTICAL COMMUNITY Because it is a new subject in Iran, temporal territory of this study is considered since the subject of float is proposed seriously and Stock Exchange organization of country approved and promulgated some ratifications and float is calculated in Tehran Stock Exchange (22) until the end of 25. This study tries to investigate the relationship of free float in companies and their price. So spatial territory will be Tehran Stock Exchange which among them 27 companies are selected with following conditions as a statistical sample: A) Statistical sample is companies that in 6 studied period, at least 2 period in their float rate made some changes. B) Their capital raising is in the form of approving the dividend. DATA ANALYSIS METOD In this research, the researcher s claim has been tested using linear regression. Way of regression test is first to test significance of total regression model that this work is done by ANOVA table. Then significance of independent variable coefficient should be investigated that this done using coefficient table. Test result includes 4 outputs that are described respectively. Tab.. Regression test of dividend rate on imported variables in the model. model Imported variable Float Stock return in the time between the approval and paying the dividend Stock return after date of dividend payment Removed vaiable method Enter In table, imported independent variables are removed and it is showed used method in regression. Table 2 estimates multiple correlation coefficient, coefficient of determination, adjusted determination coefficient and standard error respectively. Due to gained coefficient of determination from output of test, 22% of independent variables changes are justified by independent variables. Tab.2. regression test of dividend rate and floating of company s Mod el Multiple correlation coefficient.455 Determi nation coefficie nt.28 Justified determinati on coefficient.22 Stand ard error Durbin - watson Table 3 includes regression variance analysis in order to investigate the certainty of a linear relationship between two variables. Statistical hypothesis of sig test of total regression model is as follows: : there is not a linear relationship between variables. : there is a linear relationship between variables. In fact, null hypothesis states that all regression coefficients are equal to zero, : 2 3 The coefficient is at least one of the independent variable opposed to zero: Tab.3. Regression variance analysis of dividend rate and floating of of company Sig level. F statistic s Mean Square freedo m 3 Sum of Square model Changing amount of dependent variable through independen t variable 38

5 Changing amount of dependent variable by random factors total In the above table, sig is. and less than 5%, (p-value <.5), so linearity hypothesis of dependent variable relationship with independent variable is confirmed. In table 4 in column (B), beta is constant value and independent variable coefficient is provided, respectively. The coefficient table include two group of standardized Beta coefficients and non-standardized beta. In non-standardized beta coefficients, variables are not same with each other, while in standardized beta coefficients, scale of variable are same and it is possible to compare the variables. So to compare the effect of independent variable on dependent variable, the standardized coefficients are used. Tab.4. Multivariate regression equation coefficients of dividend rate on floating the of company. Sig level t statistics Standardized coefficients Non standardized coefficient Std.Error B mode Constant value Float Stock return in the time between the approval and paying the dividend Stock return after date of dividend payment Now, if α, β are constant value and the slope of community regression line, testing hypothesis can be written for these two as follows: :β = :α :α= :β Since that in this output, since that in this output, sig equality testing for regression coefficient and constant value with zero, is less than.5 so, hypothesis on the equality of regression coefficients and constant value with zero and those two should not be exited from regression equation. Therefore, this model had been shown three variables: Y X 2X 2 3X 3 In which: Y; dependent variable ( dividend rate) β= intercept β, β2, β3= estimator of the slope of regression line. X= float of companies in capital market X2= return of companies in the time between approval and payment of dividend. X3= return of companies after date of paying dividend. ŷ = X.X. 345X A) Main hypothesis: Floating rate of for companies listed in Iran capital market has significant relationship with changes in their price. B) Sub-hypothesis:. First hypothesis There is significant relationship between dividend rates of companies with float of companies in capital market. : There is not significant relationship between dividend rates of companies with float of companies in capital market. : There is significant relationship between dividend rates of companies with float of companies in capital market. : : In the mathematical mode of variable, independent variables of float for companies in capital market is shown by x and as we can see, its regression coefficient is.59 (β), it means that for one unit change in float of companies in capital market, dividend increases by.59 unit but because of sig test related to this variable is.2>.5. Thus, this correlation rate won t be significant and the researcher s claim is rejected at 95% coefficient level based on this case that there is a significant relationship between companies dividend with float of companies in capital market. 2. Second hypothesis There is significant relationship between return of companies in the time among approval of dividend and paying dividend with dividend rate in capital market. : There is not significant relationship between return of companies in the time among approval of dividend and paying dividend with dividend rate in capital market. : There is significant relationship between return of companies in the time among approval of dividend and paying dividend with dividend rate in capital market

6 : 2 : 2 In the mathematical mode of variable, independent variables of return for companies in time between approval of dividend and paying dividend is shown by x2 and as we can see, its regression coefficient is. (β2), it means that for one unit change in return of companies in the time between the approval of dividend and paying the dividend, dividend rate increases by. unit but because of sig test related to this variable is.99>.5. Thus, this correlation rate won t be significant and the researcher s claim is rejected at 95% coefficient level based on this case that there is a significant relationship between return of companies in the time among the approval of dividend and paying the dividend with dividend rate in capital market. 3. Third hypothesis There is significant relationship between return of companies after date of dividend payment with dividend rate in capital market. : There is not significant relationship between return of companies after date of dividend payment with dividend rate in capital market. : There is significant relationship between return of companies after date of dividend payment with dividend rate in capital market. : 3 : 3 In the mathematical model, variable of return for companies after date of dividend payment is shown by x3 and as we can see, its regression coefficient is (β3), it means that for one unit change in return of companies after date of dividend payment, dividend rate decreases by.345 unit but because of sig test related to this variable is.5<.5. Thus, this correlation rate will be significant and the researcher s claim is accepted at 95% coefficient level based on this case that there is a significant relationship between return of companies after date of dividend payment with dividend rate in capital market. DISCUSSION AND CONCLUSION Capital as one of the effective factors in production has an active role in economic development of country and it is necessary to provide sufficient incentives for optimal use and accumulation. Economy and business of a community follow changes in investment, savings and effective use of investors in private sector can cause to achieve the development goals. Capital market is a bridge by which the savings of entities, that have excess, will be transfer to the investment units that are in need. With the growth of savings, investment is increased and economic development is achieved. Also, the economic development and growth of a country depends on its production capacity and it is one of the most important factors in capital production. Among the most important Iran economic problems in the recent years, it is the problems which caused by lack of productive investment in the country.in advanced industrial countries, Stock Exchange is considered as a safest and cheapest place to finance long-term investments. For example, in Germany, more than 5% of people are shareholders that this rate is about 4% In Iran. Absolutely, changing in holding outbreak coefficient in countries has different causes, but certainly investment security and gaining the trust of investors influence increasing this coefficient. Approval the law of securities market for Islamic republic of Iran in December 25 is an important step to promote capital market and the nest steps in the field of its deployment will realize this important case. Stock exchange is one of the financial structure components which moving wheels of economy is impossible without it. Financial developments in industrial economics has changed the capital market into a car that cannot be removed from the economy without a fundamental change in the way of national life. Stock Exchange decreases risk and therefore capital cost as a financial intermediary through increasing transparency, monitoring on inducting and informing the companies listed in Stock Exchange and we can say that Exchange is a place for those competing on capital in order to push financial resources of capital holders towards its activates. In this study, by literature review, the basic concept is extracted and the base of design because hypotheses and statistical tests. The main hypothesis study investigates the effect of free float change rate and changes in price. The results of this research hypothesis are as follows: Main hypotheses: Floating rate of in companies listed in capital market has significant relationship with their changes of price. Sub-hypothesis:. There is significant relationship between dividend rate of companies with float companies in capital market, according to the analysis conducted, the existence of a significant relationship between dividend of companies with float of companies in capital market is rejected. 2. There is significant relationship between return of companies in the time among the approval of dividend and dividend payment with dividend rate in capital market. 3. Second sub-hypothesis at 95% confidence level based on the existence of significant relationship between return of companies in the time among the approval of dividend and dividend payment with dividend rate in capital market is rejected. Proposal based on the research findings: Proposal based on the research findings are as follows: 4

7 . Investigating the relationship between free float and trading volume in the Tehran Stock Exchange. 2. Investigating the relationship between free float and the dividend. Suggestion for the future research: By doing any research, a new path will be open and rest of the way needs doing another researches. Therefore, research doing following the results of this study appears necessary:. Studying effect of changes in free float on the market liquidity. 2. The effect of information releasing timely of a company on liquidity. 3. Liquidity, return and capital structure in Tehran Stock Exchange. exchange, Ma thesis, Tehran university, faculty of economics. [6] Shabrian, M analysis of supply and demand, casestudy- ministry of economic affairs and finance, department of economic affairs. [7] Shwarts, Robert A., (99), Reshaping Equity Market, arvard Institute of Economic Research. [8] Tolou-e-shams, A government and national economy. Publication of sciences and communication faculty. [9] Tokyo Stock Exchange, inc (May 25) "Topix Moves to Free Float". [2] Wilson, James in Frankfurt, Nov (25, 28) Financial Times London (UK). REFERENCES [] Abdeh tabrizi,.( july 23), the phenomenon of free float and determination of the based volume, the brokers company of exchange. [2] Brown, G. (22) Free Float Sensex is a better Index, BSE New Look Indices. [3] Chan kalok, Yue- Cheong Chan & wai- Ming Fong, (22) "Free Float and Market Liquidity", Evidence from ong Kong Government Intervention, ong Kong University of Science and Technology. [4] Chandra Biswal, pratap, (2) "Free float sensex is better index", institute for studies in industrial development, New Dehli. [5] FTSE 4 Good IBEX Index Ground Rules (April 28), Version., [6] jahankhani, A and Eskandari, R. (24), investigating the effects of price fluctuation limitation on Iranian Stock Exchange. Ma thesis, shahid Beheshti University. [7] Geneva, (December 2). [8] Kadkhodaee, Nori (25), export and price exchange journal. [9] Kamighahi, V analysis of effective factors on supply, demand and price in terms of theory. Economic journal of etelaat, no, [] Islami bidgoli, G and yekta, N. (997) Investigating the causes of strong fluctuations in yield and price in Tehran exchange.ma thesis, business administration faculty of Tehran. [] Mehrani far, M.R.(25), some point about the based volume and presenting an suggestion, Iran. [2] Neumann, R. et al, "Float Capitalization Index Weight in Dow Jones Stoxx SM". [3] Salehi ghadyani,j., Ebrahimi, I. (22), advanced statistical analysis, first publication, Tehran, havaye tazeh publication. [4] Shabani, M.(27), international monetary and financial markets, study and preparation organization of humanities textbooks for universities (samt). [5] Sori, A.( march 99), analysis investigating of 4