FACTORS AFFECTING THE SHARE PRICE: EVIDENCE FROM NEPALESE COMMERCIAL BANKS

Transcription

1 FACTORS AFFECTING THE SHARE PRICE: EVIDENCE FROM NEPALESE COMMERCIAL BANKS Prof. Dr. Radhe S. Pradhan 1 and Subash Dahal This study examines the factors affecting the share price of Nepalese commercial banks. Market price per share is selected as dependent variable while earning per share, divided per share, price earnings ratio, book value per share, return on assets and size were chosen as firm specific independent variables. Likewise, gross domestic product, inflation and money supply were chosen as macroeconomic independent variables. The data were collected from the banking and financial statistics and supervision report published by Nepal Rastra Bank and annual report of selected banks. The multiple regression models were estimated to test impact of firm specific and macroeconomic factors on share price of Nepalese commercial banks. Using data of 14 banks listed in NEPSE for the period 2002/ /14, the result shows that firm specific variables like earnings per share, divided per share, price earnings ratio, book value per share, return on assets and size are the major determining stock price in context of commercial banks in Nepal. Among the variables, size is found to be the most important determining variable that affects the share price. It means, larger the firm size, higher would be the stock price. Among the macro economic variables such as gross domestic product, inflation and money supply, gross domestic product is a major variable that affect the share price. Keywords: market price per share, earnings per share, divided per share, price earnings ratio, book value per share, return on assets, size Gross domestic product, inflation, money supply. I. Introduction The stock market plays an important role in economic development by promoting capital formation and raising economic growth. Trading of securities in this market facilitates savers and users of capital by fund pooling, risk sharing, and transferring wealth. Economic activities can be created by flow of reserves to the most productive investment. Investors take decisions to invest in particular shares of companies, keeping in view their share prices. Theories suggest that there is an association between changes in share prices and changes in financial fundamental variables (Nisa & Nishat, 2011). Equity markets enhance corporate efficiency, spur innovation, and provide a valuable source of capital for long-term economic development. They also provide a useful mechanism for governments to raise capital through the sale of state-owned enterprises. Moreover, equitymarket investments constitute an important element of individuals assets, particularly as governments shift their pension systems toward the private sector. In short, it is clear that 1 rspkamal@gmail.com 1 Electronic copy available at:

2 equities constitute an increasingly important capital market in the world economy (Mosley & Singer, 2008). Macroeconomic factors such as GDP growth rate and inflation are found to be positive and significant with market price per share (Shubiri, 2010). Sharma (2011) observed that eraning per share is possitively significant to market price per share. Size has a positive significant relationship with the share price while the other variables Dividend yield, Asset growth, Return on assets have insignificant relationship (Ramzan, 2013). Masum (2014) investigated the relationship between dividend policy and its impact on market performance of the share in the Dhaka stock exchange which shows positive and significant impact on the stock price. Prabath (2014) concluded that the internal factors, firm specific factors such as dividend per share (DPS), earnings per share (EPS) and book value per share (BVPS) affect positively and significant impact on the stock price. Stephen & Okoro (2014) the results suggest that earnings per share, book value per share and dividend have positive impact on determining stock prices. Aurangzeb (2012) conducted a study of 3 South Asian countries namely, Pakistan, India and Sri Lanka. Regression results indicate that foreign direct investment and exchange rate have significant positive impact on performance of stock market in South Asian countries. Interest rate has negative and significant impact on performance of stock market in South Asia. Results also indicate the negative but insignificant impact of inflation on stock market performance in South Asia. Fama (1970) examined the nature of stock market to be efficient (pricing) if current securities prices reflect all available information. In an efficient market, stock prices would be analyzed by technical analysis or fundamental analysis. Technical analysis evaluates the stock price movement and predicts the future stock price based on historical data of stock price. Fundamental analysis evaluates the intrinsic value of the company and compares it to the stock price. Srinivasan (2012) state that internal factors determine the share prices for different markets, dividend, retained earnings, size, earnings per share, dividend yield, leverage, payout ratio, and book value per share. Understanding the impact of various fundamental variables on share price is very much helpful to investors as it will help them in taking profitable investment decisions. 2 Electronic copy available at:

3 Fisher (1930) examined the nature that stock markets are independent of inflation expectations, implying that prices and inflation should move in the same direction. This is attributed to the fact that the expected nominal return on equities consists of two components, the real return and the expected inflation rate. The generalized Fisher hypothesis states that equities are a claim against real assets of the company and can serve as a hedge against inflation. When inflation is pronounced, investors would sell financial assets in exchange for real assets. If that takes place, the price of equities should reflect fully the expected inflation, and the relationship between the two variables inflation and stocks or equities should be positive. The purpose of the study is to investigate the relationship between the firm specific and macroeconomic variables as determinants and market price per share in Nepal s banking sector. Specially, it examines the impact of earning per share, dividend per share, price earnings ratio, book value per share, return on assets, size, GDP, inflation and money supply on market price per share. The remainder of this paper is organized as follow: section two describes the sample, data and methodology. Section three present the empirical results and final section draw conclusion and discuss the implications of the study finding. II Methodological aspects This study is based on the secondary data which were gathered for 14 commercials banks in Nepal. The main sources of data are banking and financial statistics published by Nepal Rastra Bank, annual report of different sample banks, supervision report of Nepal Rastra Bank and annual reports of concerned banks. In addition to these, different published articles, report, book, journal, and graduate research project are also analyzed. The data were collected on market price per share earnings per share, divided per share, price earnings ratio, book value per share, return on assets, size, Gross domestic product, inflation and money supply. The pooled cross-sectional data analysis has been undertaken in the study. The research design adopted in this study is causal comparative type as it deals with the relationship of firms specific and macroeconomic variables with market price per share. More specifically, the study examines the effect of earnings per share, divided per share, price earnings ratio, book value per share, 3

4 return on assets, size Gross domestic product, inflation and money supply with market price per share. The data were collected for the period of 2002/ /14. Table 1 shows the number of commercial banks selected for the study along with the period and number of observation. Table 1 Selection of banks, study period and number of observation S. No. Bank Study Period Observations Joint Venture Banks Everest Bank Ltd Himalayan Bank Ltd Nepal Bangladesh Bank ltd Nabil Bank Ltd Nepal SBI Bank Limited Standard Chartered Bank Ltd Non-joint Banks Bank of Kathmandu Kumari Bank Ltd Laxmi Bank Limited Lumbini Bank Ltd Machhachapuchhre Bank Ltd Nepal Credit & Com. Bank Nepal Investment Bank Ltd Siddhartha Bank Limited Total Number of Observation 168 Source NRB report, 2014 The Model As a first approximation the model estimated in this study assumes that the market price per share on firm specific and macroeconomic variables as may be seen as under: Market price per share = f (firm specific variables) Market price per share = f (macroeconomic variables) Market price per share = f (firm specific variables, macroeconomic variables) 4

5 The firm specific variables selected in this study are earnings per share, dividend per share, Price earnings ratio, book value per share and size. The macroeconomic variables mainly include GDP growth rate, inflation and money supply. MPSit= α0 + α1epsit+ α2divit+ α3p/e ratioit+ α4bvpsit+ α5roait+ α6sit +εit MPSit= α0 + α1gdpit+ α2infit+ α3 MSit +εit MPSit= α0+α1epsit+α2divit+α3p/eratioit+α4bvpsit+α5roait+α6sit +α7gdpit+α8infit+α9msit +εit Where, the market price per share is used as a dependent variable and measured in term of MPS. The independent variables consist of firm specific and macroeconomic variables as under: Firm specific variables EPS= Earnings per share DPS= Dividend per share P/E ratio= Price earnings ratio BVPS= Book value per share ROA= Return on assets S= Firm size Macroeconomic variables GDP= Gross domestic products INF= Inflation MS= Money Supply Earnings per share: Earnings per share, also called net income per share, is a market prospect ratio that measures the amount of net income earned per share of stock outstanding. Sharma (2011) the study revealed that earning per share has significant impact on the market price of share. Bhatt & JK (2012) found that EPS and market value of equity share in the Indian context are positively related. Based on it, this study develops the following hypothesis: H1: There is a positive relationship between MPS and EPS. 5

6 Dividend per share: The sum of declared dividends for every ordinary share issued. Dividend per share (DPS) is the total dividends paid out over an entire year (including interim dividends but not including special dividends) divided by the number of outstanding ordinary shares issued. Modigliani and Miller (1958) firms share price is based upon its earnings; firm s value is unrelated with dividend policy. Rashid and Anisur Rahman (2008) and Zakaria et al. (2012) found significant positive relationship between the dividend and share price. Based on it, this study develops the following hypothesis: H2: There is a positive relationship between MPS and DPS. Book value per share: BVPS is financial measure that represents a per share assessment of the minimum value of a company's equity. More specifically, this value is determined by relating the original value of a firm's common stock adjusted for any outflow (dividends and stock buybacks) and inflow (retained earnings) modifiers to the amount of shares outstanding. Sharma (2011) conducted a study that book value per share has significant impact on the market price of share. Emamgholipour et al.,(2013) carried out a book value per share has positive impact on the market price of share. Based on it, this study develops the following hypothesis: H3: There is a positive relationship between MPS and BVPS. Price earning (P/E) ratio: The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing a company that measures its current share price relative to its per-share earnings. Nickolson( 1960) the study revealed that stocks with a low P/E ratio have a better investments performance than high P/E stocks. Based on it, this study develops the following hypothesis: H4: There is a positive relationship between MPS and P/E ratio. Return on Assets (ROA) ROA is also another major ratio that indicates the profitability of a bank. It is a ratio of income to its total asset. Emekekwue (2008) found return on assets as a ratio which seeks to measure the 6

7 amount of profit generated from the entire assets of the firm. Based on it, this study develops the following hypothesis: H5: There is a positive relationship between MPS and ROA. Firm size (S) Total assets or total net assets are used to describe a firm's size. The shares of large companies are actively traded and they provide more liquidity and marketability to the investors. Ramzan (2013) results show that size has a positive significant relationship with the share price. Based on it, this study develops the following hypothesis: H6: There is a positive relationship between MPS and S. Gross domestic product: Nominal GDP is the total production of goods and services valued at current prices. Nominal GDP is gross domestic product in current dollars. Shubiri (2010) examined the relationship microeconomic factors with the stock price and found highly positive significant relationship between market price of stock and gross domestic product. Nisa & Nishat (2011) it is found that macroeconomic indicators GDP growth has significant relationship with the stock prices. Based on it, this study develops the following hypothesis: H7: There is a positive relationship between MPS and GDP. Inflation: Inflation refers to the measures changes in the price level of a market basket of consumer goods and services purchased by households. Malaolu et al. (2013) revealed the effect of monetary authorities and policy makers should be more concerned about the changes in inflation rate due to its significant negative impact on stock price movements in Nigeria. Based on it, this study develops the following hypothesis: H8: There is a positive relationship between MPS and INF. 7

8 Money supply: In economics, the money supply or money stock is the total amount of monetary items available in an economy at a specific time. There are several ways to define "monetary items," but standard measures usually include currency in circulation and demand deposits (depositors' easily accessed assets on the books of financial institutions). Based on it, this study develops the following hypothesis: H9: There is a positive relationship between MPS and MS. III. Results and discussion Table 2 shows the descriptive statistics. Clearly, market price of share ranges from Rs.80 to Rs. 6830, leading the average market price of share to Rs The earnings per share range from negative Rs to Rs , leading to the average of Rs Likewise, dividend per share ranges from zero to Rs.140, leading to the average of Rs Table 2 Descriptive statistics for the selected variables (The Table shows descriptive statistics- mean, standard deviation, minimum and maximum values variables associated with 14 sample banks for the period 2003 to EPS refers to the earning per share, DPS refers to dividend per share, P/E ratio refers to price earnings ratio, BVPS refers to book value per share, ROA refers to the return on assets, SIZE refers to the total asset, GDP refers to the gross domestic product, INF refers to the inflation and MS refers to the money supply.) Descriptive Statistics Variables N Minimum Maximum Mean Std. Deviation MPS (in Rs) EPS (in Rs) DPS (in Rs) PE_ratio BVPS (in Rs) ROA (%) ln_size (in Rs) GDP(%) INF (%) MS (in Rs) Price earnings ratio ranges from negative percent to percent, leading to the average of percent. Book value per share ranges from negative Rs. 364 to Rs leading 8

9 to the average of Rs Return on assets ranges from negative percent to percent, leading to the average of 1.59 percent and size defined in terms of total assets ranges from 5.94 percent to 7.94 percent, leading to the average of 7.25 percent. The variation as indicated by SD is largest for the dependent variable market price of share and lowest for independent variable size. Correlation analysis Having indicated the descriptive statistics, the Pearson Correlation Coefficients have been computed. The correlation coefficients show the magnitude and direction of the linear relationship between market value of share and variables affecting market price of the share of the sample commercial banks. The Pearson's correlation coefficients of market price of share have been computed and the results are presented in Table 3. Table 3: Correlation analysis (This table shows bivariate Pearson s correlation coefficients between market value of share and variables affecting market price of the share.eps, DPS, P/E ratio, BVPS, ROA, Total asset, GDP, INF and MS as defined in the table The correlation coefficients are based on the data from 14 sample banks with 168 observations for the period 2003 through ) MPS 1 MPS EPS DPS PE_ratio BVPS ROA ln_size GDP INF MS EPS.479 ** 1 DPS.842 **.673 ** 1 PE_ratio BVPS ** 1 ROA.159 *.469 **.180 * ln_size.419 **.492 **.492 ** * 1 GDP.202 ** *.226 ** 1 INF.188 * *.222 **.518 **.314 ** 1 MS.362 ** *.396 **.478 ** 1 Source: SPSS results outcome **. Correlation is significant at the 0.01 level (2-tailed). *. Correlation is significant at the 0.05 level (2-tailed). The highest correlation has been observed to be between market price of share and dividend per share. The market price of share is positively related to earnings per share, dividend per share, price earnings ratio, book value per share, return on assets, size, gross domestic 9

10 product, inflation and money supply. The result shows that higher the earnings per share, dividend per share, price earnings ratio, book value per share, return on assets, size, gross domestic product, inflation and money supply, higher would be the market price per share. Regression analysis The regression of firm specific variables on market price per share has been analyzed in terms of MPS. The firm specific factors affecting on MPS produced the results as indicated in Table 4. The table indicates that beta coefficient is positive for DPS which reveals that higher the DPS, higher would be the MPS. However, beta coefficient is significant for DPS at 1 percent level of significance. Table 4: Estimated relationships between share price and its firm specific variable of commercial bank (Table 4 shows estimated relationship of linear regression of share price and its firm bank specific variables on selected Commercial Bank. The results are based on 12 years ( ) time series data of commerci1al bank by using linear regression model. The estimated model of the study is: MPSit = α0 + α1epsit+ α2divit+ α3p/e ratioit+ α4bvpsit+ α5roait+ α6sit +εit The reported values are intercepts and slope coefficients of respective explanatory variables with t-statistic in the parenthesis. R Square indicates the predictive explanatory power of the model while F-ratio shows the model fit.) Regression coefficient of Models Intercept EPS DPS P/Eratio BVPS ROA SIZE R2 SSE F (2.98**) (7.04**) (3.15**) (9.02**) (9.09**) (8.46**) (-5.28**) (2.003)* (2.88)** (0.056) (1.784) (0.072) Source: SPSS results outcome (20.08**) (20.31)** (19.670)** (17.37)** (19.87)** (17.22)** 2.61 (1.33) 2.38 (2.26)* 2.4 (2.27)* 0.39 (1.72) (2.07)* 3.46 (0.18) 5.34 (0.28) 3.17 (0.16) (5.95)** (0.14) (0.12)

11 **. Correlation is significant at the 0.01 level (2-tailed). *. Correlation is significant at the 0.05 level (2-tailed). The beta coefficients are positive for earnings per share, price earnings ratio, book value per share, return on assets and size. The result shows that higher the earnings per share, price earnings ratio, book value per share, return on assets and size, higher would be the market price per share. However, beta coefficient is significant at 1 percent level of significance for EPS, ROA and size in only one equation only. The regression of macroeconomic variables on market price per share has been analyzed in terms of MPS. The macroeconomic factors affecting on MPS produced the results as indicated in Table 5. The table indicates that beta coefficient is positive for GDP which reveals that higher the GDP, higher would be the MPS. However, beta coefficient is significant for DPS at 5 percent level of significance. Table 5: Estimated relationships between share price and its macroeconomic variables of commercial banks. (Table 5 shows estimated relationship of linear regression of share price and its macroeconomic variables on selected Commercial Bank. The results are based on 12 years ( ) time series data of commerci1al bank by using linear regression model. MPS it= α 0 + α 1GDP it+ α 2INF it+ α 3 MS it +ε it. The reported values are intercepts and slope coefficients of respective explanatory variables with t-statistic in the parenthesis. R Square indicates the predictive explanatory power of the model while F-ratio shows the model fit.) Regression coefficient of Model Intercept GDP INF MS R2 SE F (-0.38) (2.61**) (0.7) (2.47*) (0.73) (5.00**) (-1.01) (1.99*) (1.74) (-0.46) (2.47)* (0.09) (3.82) Source: SPSS results outcome **. Correlation is significant at the 0.01 level (2-tailed). *. Correlation is significant at the 0.05 level (2-tailed). The beta coefficients are positive for inflation and money supply. The result shows that higher the inflation and money supply, higher would be the market price per share. However, beta coefficient 11

12 is significant at 5 percent and 1 percent level of significance for inflation and money supply in only one equation only. The regression of firm specific and macroeconomic variables on market price per share has been analyzed in terms of MPS. The firm specific and macroeconomic factors affecting on MPS produced the results as indicated in Table 6. Table 6: Estimated relationships between share price and internal and external factor affecting share price of commercial bank of Nepal (Table 6 shows estimated relationship of linear regression of share price and its firm internal and macroeconomic variables on selected Commercial Bank. The results are based on 12 years ( ) time series data of commerci1al bank by using linear regression model: MPSit= α0 + α1epsit+ α2divit+ α3p/e ratioit+ α4bvpsit+ α5roait+ α6sit + α7gdpit+ α8infit+ α9 MSit +εit The reported values are intercepts and slope coefficients of respective explanatory variables with t-statistic in the parenthesis. R Square indicates the predictive explanatory power of the model while F-ratio shows the model fit.) Regression coefficient of Models Intercept EPS DPS P/Eratio BVPS ROA SIZE GDP INF MS R2 SE F (2.98**) (7.04**) (3.15**) (20.08**) (9.02**) 2.61 (1.33) (9.09**) 0.39 (1.72) (8.46**) (2.07) (-5.28**) (5.95**) (-0.38) (0.7) (0.73) (2.003)* (2.88)** (0.056) (-3.4)** (-1.73) (-4.04)** (20.31)** (19.670)** (17.37)** (20.99)** 31.1 (20.29)** (21.95)** 2.38 (2.26)* 3.46 (0.18) (0.14) (2.61**) (2.47*) (5**) (4.36)** (3.04)** (7.21)**

13 (1.784) (19.87)** 2.4 (2.27)* 5.34 (0.28) (0.072) (17.22)** (0.16) (5.13)** (0.88) (-3.69)** (22.27)** (1.37)** Source: SPSS results outcome **. Correlation is significant at the 0.01 level (2-tailed). *. Correlation is significant at the 0.05 level (2-tailed) (0.12) (5.23)** (1.43) ,46 (1.94) (5.72)** The table indicates that beta coefficient is positive for DPS, EPS and money supply which reveals that higher the DPS, EPS and money supply higher would be the MPS. However, beta coefficients are significant for DPS, EPS and MS at 1 percent level of significance. The beta coefficients are positive for price earnings ratio, book value per share, return on assets, size and GDP. The result shows that higher the, price earnings ratio, book value per share, return on assets, size and GDP, higher would be the market price per share. However, beta coefficient is significant at 5 percent level of significance for price earnings ratio, book value per share, return on assets, size and GDP in only two equations only. IV. Conclusion Many studies have been undertaken to study on factors affecting the share price in development countries. This study investigates the relationship between share price, bank specific and microeconomic variables of selected Nepalese commercial banks. The stock price in the market is not static rather it changes every day. The most obvious factor that influence are demand and supply factors. The price of any commodity is affected by both micro-economic and macro-economic factors. This study aims at examining the relationship between bank specific and macroeconomic variables and MPS in Nepal s banking sector. It determines the effect of earnings per share, dividend per share, price earnings ratio, book value per share, return on assets, size, gross domestic product, inflation and money supply on MPS. The study is based on pooled crosssectional analysis of secondary data of 14 commercial banks for the period 2002/ /14. As first approximation to the theory, this study hypothesizes that the MPS depends on several bank specific and macroeconomic variables such as earnings per share, dividend per share, price 13

14 earnings ratio, book value per share, return on assets, size, gross domestic product, inflation and money supply. The study reveals that average market price of share is Rs The average earnings per is Rs Likewise, the average dividend per share is Rs The study also reveals that the average Price earnings ratio, book value per share, ROA and size are percent, Rs , 1.59 percent Rs billion respectively. Similarly, the average macroeconomic variables such as GDP, inflation and money supply are 4.32 percent, 7.87 percent and Rs billion respectively. The Variables like earning per share, price earnings ratio, book value per share and return on assets are very weak effect in determining market price per share. The implication of this study suggests a rational investor s need to consider dividend per share, firm size and money supply before making investment decision along with signaling and asymmetric information in context of imperfect stock market like Nepal. References Aurangzeb A., (2012). Factors affecting performance of stock market: Evidence from South Asian countries. International Journal of Academic Research in Business and Social Sciences, 2(9), Bohl, M. T., P. L. Siklos, & T. Werner (2007). Do central banks react to the stock market? The case of the Bundes bank. Journal of Banking and Finance, 31(3), Bhatt, P., & S. JK. (2012). Impact of earnings per share on market value of an equity share: An empirical study in Indian capital market. Journal of Finance, Accounting and Management, 3(2),

15 Emamgholipour, M., A. Pouraghajan, N. A. Tabari, M. Haghparast, & A. A. Shirsavar (2013). The effects of performance evaluation market ratios on the stock return: Evidence from the Tehran stock exchange. International Research Journal of Applied and Basic Sciences, 4(3), Emekewue P. (2014). Corporate Financial Management, Depot Legal No. 234/2008 First Quarter. Eugene F. Fama (1970). Efficient capital market:a review of theory and empirical work. chicagon journal, 25(2), Fisher, I. (1930). The theory of interest. NewYork: Macmillan. Journal of monetary Economic, 19(1), 3-24 Malaolu, V., J. E. Ogbuabor, & A. Orji (2013). Determinants of stock price movements in Nigeria: Evidence from monetary variables. Journal of Economics and Sustainable Development, 4(14), Masum, A. A. (2014). Dividend policy and its impact on stock price A study on commercial banks listed in Dhaka stock exchange. Global Disclosure of Economics and Business, 3(1), Miller, M. H., & F. Modigliani (1961). Dividend policy, growth, and the valuation of shares. The Journal of Business, 34(4), Mosley, L., & D. A. Singer (2008). Taking stock seriously: Equity-market performance, government policy, and financial globalization. International Studies Association, 52(4), Nickolson, S. F. (1960). Price Earning Ratio. Financial Analysts Journal, 16, Nisa, M.- U., & M. Nishat (2011). The determinant of stock prices in Pakistan. Asian Economic and Finance Review, 1(4), Srinivasan P. (2012). Determinants of equity share price in India: A panel data approach. The Romanian Economic Journal, 15(46),

16 Prabath, U. S. (2014). The impact of accounting variables on stock price: Evidence from the Colombo stock exchange, Sri Lanka. International Journal of Business and Management, 9(5), Ramzan, M. Y. (2013). A view about the determinants of change in share prices: A case from Karachi stock exchange (banking sector). Interdisciplinary Journal Of Contemporary Research In Business, 4(12), Rashid, A., & A. Rahman (2008). Dividend policy and stock price volatility: Evidence from Bangladesh. Journal of Applied Business and Economic, 8(4), Sharma, S. (2011). Determinants of equity share prices in India. Journal of Arts, Science & Commerce, 2(4), Shubiri, F. N. (2010). Analysis the determinants of market stock price movements: An empirical study of Jordanian commercial banks. International Journal of Business and Management, 5(10), Stephen, E. A., & E. G. Okoro (2014). Determinants of stock price movement in Nigeria: Evidence from the Nigerian stock exchange. Journal of Economics and Sustainable Development, 5(3), 1-7. Zakaria, Z., J. Muhammad, & A. Zulkifli (2012). The impact of dividend policy on stock price volatility: Malaysian construction and material company. International Journal of Economic and Management Science, 2(5),