An Analysis of Stock Price Determinants

Transcription

1 An Analysis of Stock Price Determinants Krishna Kant Agarwalla Shikha Bhatia Abstract Stock price behaviour has been a subject of voluminous research across globe. Nonetheless, the puzzle of stock price determinants is yet to be conclusively solved. This study aims to find the major determinants of stock price prices in the post recession time period in Indian setting. Indian market has witnessed many peculiarities post economic recession and it would be interesting to analyse the set of variables that may have newly emerged or the important variables whose effects may have undergone some transition. The firm-specific variables would be analysed for the constituent companies of NSE500 to identify the determinants of stock prices. For this analysis we will be using the Correlation and Regression methodology. ISBN no Page 1102

2 1. Introduction The stock market plays an important role in each and every individual s life either directly or indirectly and the reasons for sudden change in stock price are always consider as one of the most debatable topic. Few researchers claims it to be Macro-economic variables while other says it to be Firm-specific variables like the earning per share, dividend per share, profitability ratio, etc as more significant. Understanding the determinants of share price is very important as it will be beneficial for both investor as well as the company. By understanding the determinants that effect s the share price the investor will be on a position to make various profitable investment decisions whereas talking from the company point of view the company can get to know about the Intrinsic value of their share and can analyses about it being over-valued or undervalued. This study is done keeping in mind the Firm-specific variables. This study is done on Indian companies listed in NSE500 and the time period is between The study is further divided into 4 sections. The 2 nd section is about the Review of Literature, 3 rd section is about Methodology, 4 th section is about Analysis and the 5 th section is about Conclusion. ISBN no Page 1103

3 2. Review of Literature: Various researches have been done before on this topic using both the variables. Sharma (2010) used the data from SEBI, BSE and CMIE from and found that different factors like Dividend per share, Earning per share, Book Value and Price Earning per ration had a positive effect where as factor like Dividend payout ratio had a negative effect on the share price of the selected companies. The method used by him was Correlation and regression. Nirmala (2011) used the data from BSE, CMIE between and founded that different factor like Dividend, Profitability and Price earnings ratio had a positive effect on share price where as factor like Leverage had a negative effect on the share price. The methods used by her were Panel unit root test, fully modified ordinary least square method and Correlation. Vijaykumar (2010) investigated the data from CMIE from and concluded that variables like Book value, Growth rate, Dividend cover, Earning per share and Dividend yield had a positive effect on share price where as variables like Dividend per share and Price ratio had a negative effect on the share price of the selected companies. The methods used by him were Hypothesis, Correlation and Multiple regression analysis. Nisa & Nissat (2012) examined the data of Karachi stock exchange from and says that variables like Previous behaviour of stock price, Company size, Gdp growth, Share turnover ratio and Earning per share shows a positive relation where as variables like rate of interest and Inflation shows a negative relation with the share price. The method used by them was Generalised method of moments. Hui et al. (2014) studied the data of Singapore straits times from and concluded that variables like Interest rate, Money supply and GDP had a positive impact on share price where as variables like Exchange rate and Consumer price index shows a negative relation with the share price. The method used by them was Ordinary least squares. Shubiri (2010) used the data from Amman stock exchange from and founded that variables like Net Asset value per share, GDP, Dividend per share and Earning per share shows a positive relationship with the price of share where as variables like Inflation and Market Interest rate shows a negative relation with the price of the share. The methods used by him were Simple and Multiple regression method. Garcia and Lui (1999) used the pooled data from 15 different countries for the year period of founded that different variables like Real income, Financial Intermediary Development and Stock Market Liquidity shows a positive relation with Stock Price whereas variables like Saving Rate and Inflation shows negative relation with Stock Price. The method used by ISBN no Page 1104

4 them was Correlation & Regression. Another paper written by Lai et al. (2011) says that different Macro economic variables like Money supply and Industrial Production shows a positive relation with the share price where as the variables like Crude oil price and Inflation rate shows negative relation with the share price of a country. The data were taken for the time period of ISBN no Page 1105

5 3. Methodology: Data: The data used for this research is secondary data which is collected from Prowess database 1 and from companies Annual report. Objective: The objective of the study was to find the determinants of stock price. In this study NSE500 companies were selected finding the different Firm specific variables which affect the stock price. The time period taken was Methodology: The methodology employed is Correlation and Regression and the software used is SPSS. Variables: The study looks for different Firm specific variables like Earning per Share, Share Price, Book Value, Dividend rate, CFOA and Size. The time period of this variables are from 2008 to Earnings per Share: The net profit of a company is the total amount of money that is left with it after the payment of all the expenses that are incurred for the year. When we talk about Earnings per share it means that what is the return that we get in form of net income on our Investments. It is believed that Earnings per share have a direct relationship with the Share price. It means that if Earning per share is high than the share price will also increase. In the study of Sharma (2010), it is found that Earnings per share have a positive value and the same finding was done by Srinivasan (2012). Dividend Rate: The total expected dividend payments from an investment, fund or portfolio expressed on an annualized basis plus any additional non-recurring dividends. For this study it is hypothised that there is a positive relation with the share price. Cash flow from operating activities: The cash flow from operating activities says that it is the amount of money that a company is left with after the completion of its operating activities. It is expected that there is a significant relationship between the amount of cash left and the share price. The study also expects that more is the cash left more is the share price. Size: Size of a company is an important factor to have a look on. It is usually believed that a company with bigger size is better to invest on rather than investing on a company of small 1 Prowess is a database maintained by CMIE which has financial data of over companies. ISBN no Page 1106

6 size. The reason behind this hypothesis is that the company with bigger size have better return than company whose size is not so big. For our study we have expected Logarithm net sales as the size of the company. Nisha & Nissat (2012) in their study has found that the company size has a positive relation with the share price. The same finding was also found in the study of Iqbal et al. Book Value: The book value per share can be said as the total asset per share that an organization have with itself. It is actually the total worth of a firm at the present time. It is that value at which an asset is recorded in the balance sheet. In our study we have assumed that book value have a significant and positive relationship with the share price of a company. The same result was founded by Sharma (2010) and also by Vijaykumar (2010). Table 2: Variables Variables Measure Hypothesized Relation Dependent Variable Stock Price Closing Share Price Independent Variable Earnings Per Share Net Income/No. of Shares Positive Dividend rate (recent dividend)*(no of Positive dividend per year)+extra dividend Cash Flow from Operating Net income + Noncash Positive Activities Expenses + Changes in Working Capital Size Natural logarithm of net sales Positive Book Value Per Share (equity share capital + Positive shareholder reserve)/total no of equity share outstanding ISBN no Page 1107

7 4. Analysis of Findings: The study used the regression and correlation method to find the relationship between Firm specific variables and Stock price. For this analysis we did separate correlation starting from the year 2008 to We also found a multiple regression for all this years. Regression Table 3: Regression Analysis Analysis: Coefficients Year Intercept *** *** *** *** EPS 4.554*** 6.951*** 6.306*** *** 8.270*** Div_Rate.888***.535***.402*.710***.816***.658***.164 CFOA Size *** *** -44.5*** * BV 1.212***.473*** 1.037** 3.361*** 2.359*** N F *** 137.7*** *** *** *** *** *** R Square Adjusted R Square DW Note: * Significance at 10% ** Significance at 5% *** Significance at 1% For this regression analysis Stock price is taken as the dependent variable and the independent variables are EPS, Dividend rate, Size, Book value and CFOA. The R square for different years we can find that for 2008 it is.243, for 2009 it is.634, for 2010 it is.107, for 2011 it is.885, for 2012 it is.881, for 2013 it is.638 and for 2014 it is.527. In our analysis it is found that the relationships between the variables are very high for the years 2011 and 2012 whereas the relationship is low for the years 2008 and ISBN no Page 1108

8 Out of all the Independent variable used it is seen that the variable EPS is found to be significant for almost all the years (except for the year 2011 and 2012). The variable Dividend Rate is also found as significant for all the years (except for 2014) whereas the variable Cash flow from operating activities is found to be insignificant for all the given years. The Independent variable Size is insignificant for three years (2008, 2009, and 2010) but is then found to be significant for the last four years (2011, 2012, 2013, and 2014). Our last variable is Book value where we found that this variable is significant for the first five years (from ) but was found to be insignificant for the last two years (2013 & 2014). So from this it can said that out of all 5 independent variables EPS, Dividend Rate & Book value is found to be most significant variable whereas the variable cash flow from operating activity is found to be insignificant in our study. Correlation Analysis: Table 4: Correlation 2008 Price EPS Div_rate CFOA Ln_Size BV Price EPS.374*** Div_rate.304***.256*** CFOA.075* Ln_Size.075*.083** *** BV.408***.525***.177***.147***.216*** For the year 2008 the study shows that all the variables are positively correlated and are also significant. Out of all the variables taken, the study show that EPS, Dividend rate and book value is found to be highly correlated than other variables. Table 5: Correlation ISBN no Page 1109

9 2009 Price EPS Div_rate CFOA Ln_Size BV Price EPS.754*** Div_rate.328***.179*** CFOA.114** ** Ln_Size.075* *** BV.626***.672***.131***.208***.229*** For the year 2009 the study shows that all the variables are positively correlated and out of all these variables EPS and Book value are found to be highly correlated. Table 6: Correlation 2010 Price EPS Div_rate CFOA Ln_Size BV Price EPS.300*** Div_rate.120***.185*** CFOA Ln_Size *** BV.285***.736***.073*.080**.218*** For the year 2010 the study found that out of all the taken variables only 3 variables were found to be significant. These variables were EPS, Dividend Rate and Book value. Out of these 3 variables EPS and Book value are found to be highly correlated. ISBN no Page 1110

10 Table7:Correlation 2011 Price EPS Div_rate CFOA Ln_Size BV Price EPS.204*** Div_rate.116***.187*** CFOA ** Ln_Size *** BV.933***.232*** The study for the year 2011 shows that in this year also only 3 variables were found to be significant out of all these variables. The significant variables were EPS, Dividend rate and Book value. Out of all these variables EPS and Book value were found to be most highly correlated. Table 8: Correlation 2012 Price EPS Div_rate CFOA Ln_Size BV Price EPS.341*** Div_rate.139***.174*** CFOA Ln_Size *** BV.927***.354*** For the year 2012, the study found that like the previous year only 3 variables were found to be significant. Those variables were EPS, Dividend rate and Book Value. Out of these 3 variables Book value was found to be highly correlated. ISBN no Page 1111

11 Table 9: Correlation 2013 Price EPS Div_rate CFOA Ln_Size BV Price EPS.774*** Div_rate.282***.132*** CFOA ** Ln_Size *** BV.639***.842***.076**.125***.159*** For the year 2013, it was found that out of all the variables we took only 3 variables were found to be significant. These variables are EPS, Dividend rate and Book value. Out of all these variables it was found that EPS was the most highly correlated variable. Table 10: Correlation 2014 Price EPS Div_rate CFOA Ln_Size BV Price EPS.723*** Div_rate.224***.221*** CFOA Ln_Size *** BV For the year 2014, the study found that only 2 variables were found significantly correlated. These variables were EPS and Dividend rate. Out of these variables it was found that EPS was most highly correlated variable. ISBN no Page 1112

12 5. Conclusion The study was under-taken to examine the relationship between the dependent variable share price and the firm specific variables like EPS, Dividend rate, Book value, CFOA and Longitudinal Size of the firm. The study was done for the period from 2008 to The result that the study found says that Earning per share (EPS), Dividend rate and book value were found to be most significant out of all the variables. The study also proved that EPS and Dividend rate were the strongest variables as these were found to be significant for all the years. Book value also impact the share price as this variable was also found to be significant for all the years (except 2014). The study says us that the companies should focus on their dividend policy as it does have impact on their share price and the company should pay a regular and constant dividend. The study also says that the investors look for the companies EPS and Book value as they think that these variables have direct and positive relation with share price of a company. ISBN no Page 1113

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