1 A COMPARATIVE STUDY OF THE RELATIONSHIPBETWEEN STOCK PRICE PERFORMANCE AND FIRM’S PROFITABILITY SUNDAY C. NWITE SENIOR LECTURER DEPARTMENT OF BANKING AND FINANCE EBONYI STATE UNIVERSITY – ABAKALIKI
2 PHONE NO: 080-37743134 E-MAIL: firstname.lastname@example.org ABSTRACTIn Nigeria, there are many investors. Most of the investments are done onstocks, equities, shares etc. investors prefer to invest in the area that hasbetter performance and profitability. In most cases, because of the volatility ofthe market, they seek advise on the market, the annual report of suchcompanies for at least five years. There are a lot of attractions to invest. It isone of the best ways of savings, and an idle fund is also a wasted fund and itis also an avenue to have a seat on the board. The share certificates caneasily be converted into liquidity and also act as collaterals. This worktherefore wants to look at the relationship between the stock priceperformance and their profitability. And it was found that such firm that makemore profits do therefore have a better performance of their stock prices.Conclusion was drawn that that the stock price performance influences theprofit of the firm. Recommendations were made that investors should alwaysconsult analyst of the stock market, professionals, stock brokers. They canalso seek information from other research professional bodies. This will help
3them to understand companies that do well and the ones that are not doingwell so that they will know the one to invest.KEYWORDSStock price, performance, profitability, collaterals, seat on the board.PAPER TYPE: RESEARCH PAPER INTRODUCTION
4The capital market is the long-term financial market. It is made up of primaryand secondary market and institutions, which facilitate the issuance andsecondary trading of long-term financial instruments. The capital marketprovides funds to industries and governments to meet their long-term capitalrequirements, such as financing for fixed investments, etc. The Nigerian stockexchange as a vision to promote capital formation in the country by providingissuers and investors with a responsive, fair efficient stock market (Ahmed,2008).The Nigerian capital market (NCM) first came into existence in 1960 with theestablishment of the Lagos Stock Exchange.Before the establishment of the Lagos Stock Exchange in 1960, almost allformal savings and deposits went through the banking system while majorcapital balance were invested for the country by the British on the LondonStock Exchange. The purpose of investment in stocks shares and equities isto make profit by dividend payout or to increase the volume of the shares byploughing back the profit made.In most cases, people prefer those companies that are doing well in theNigerian Capital Market. It is a believe that companies that are doing well willmake more profit all these are assumptions. The work wants to have acomparative study on the relationship between stock prices and profitability of
5the firm, to know whether such assumptions are true or not using publisheddata.HISTORICAL DEVELOPMENT OF NIGERIAN CAPITAL MARKETThe beginning of the capital market in Nigerian can be traced to the country’scolonial administration which in the 1946 established a 10 years plan forNigerian under which long-term funds were raised in the United Kingdom andNigeria for financing small community improvement project, educationalresearch and educational infrastructure and to induce private sector industrialand agricultural development (Okereke, 2000).Formal capital market activities in Nigeria came into existence with theestablishment of the Lagos Stock Exchange in March 1960 and in September15, 1961, it commenced business before the establishment of the Lagos StateExchange, almost all formal savings and deposits went through the bankingsystem while major capital balances were invested for the country by Britishon the London Stock Exchange. The exchange started operations with 19securities listed for trading. In an effort to accelerate the orderly growth of thecapital market in Nigeria, the federal government in 1962 established theCapital Issue Committee. The committee was changed, inter-alia with theresponsibility of regulating the timing of public issues of securities. To furtherstrengthen the regulatory oversight of the capital issue committee was later
6changed to Capital Issue Committee (CIC) under the Capital Issue CommitteeAct (1973). In 1977 following the federal government review panel headed byDr. Pius Okigbo, the Lagos Stock Exchange was changed to Nigerian StockExchange.Following a comprehensive review of the Nigeria financial system in 1978, theSecurities and Exchange Commission (SEC) was established by thepromulgation of the SEC (1979). The Act was enacted at a time when theindigenization exercise was in progress and the commission was saddled withthe responsibility of valuing the shares of enterprises.There are other landmark events in the history of capital market among whichwere the setting up of Adeosun and Okigbo panels, the inter-ministerialcommunities, the review of companies and allied matters and theindigenization decrees.In 1996, the federal government set up a panel on the review of the Nigeriancapital market known as Oditte Panel. The panel submitted its report inOctober, 1996 with recommendations to the federal government which werethe urgent need to mobilize the country for prosperity, to provide facilities forcapital mobilization and trading in the rural areas in form of capital trade points(mini stock exchange) and the establishment of a technology driven nationalexchange in Abuja to be known as the Abuja Stock Exchange (ASE) to
7operate to international standards. Abuja Stock Exchange was incorporated asa public liability company on June 17, 1999 and received its license to operateas full fledged community exchange on August 1, 2000.Other branches of stock exchange in Nigeria includes:Kaduna, 1978; Port – Harcourt 1980; Kano 1989, Onitsha February 1990;Ibadan August, 1990; Yola April 2002 and Benin 2005.THE REASONS FOR THE EXISTENCE OF NIGERIAN CAPITALMARKETThe Nigerian capital markets just like its counterparts in other countries have alot of reasons to perform in other to ensure economic development; there are: 1. Provide an additional channel for engaging and mobilizing domestic savings for productive investment and represents an alternative to bank deposits, real estate investment and the financing of consumption loans. 2. Provides depositors with better protection against inflation and currency depreciation. 3. It fosters the growth of the domestic financial services sector and the various forms of institutional savings such as life insurance pension funds.
8 4. It improves the gearing of the domestic corporate sector and helps reduce dependence on borrowing. 5. It improve the efficiency of capital and a market mechanism for management changes as compared with the administrative or political mechanism of public sector corporation. 6. To facilitate the transfer of enterprises from the public sector to the private sector. 7. To encourage privatization by increasing the marketability access to new issues. 8. Provide access to finance for new and smaller companies and encourage institutional development in facilitating the setting up of Nigeria’s domestic funds, foreign funds, and venture capital funds.VARIOUS PRODUCTS SOLD IN THE FINANCIAL MARKETAccording to Nwite (2005) financial market is where exchange of financialresources takes place. That is a market where sellers and buyers of financialresources come into contact. Thus, a financial market produces an avenue forsurplus/idle cash balances to be employed in areas of deficit finances, as itmake short medium and long-term surplus funds available.The various products sold in the financial market. There are two types offinancial market. They are money market and capital market. The components
9or the products or services sold in the money market are treasury bills,commercial papers, bankers acceptance and certificate of deposit. It is a shortterm credit. On the other hand, the capital market is a long term market forlong term investments. The types of products sold there are share, securities,bonds etc.VARIOUS TYPES OF MARKET THAT EXIST IN THE CAPITALMARKET.Money. Originally, came in as medium of exchange in the formally organizedmarket. However, the society later got highly developed and sophisticated thatpeople, institutions and governments needed funds to execute projects. Therewas a direct need for capital, money or funds.Consequently, the financial market evolved. The financial market is dividedinto money and capital market.Money market is a forum where short-term capital is sourced. Therefore, thecorporate body, that requires such fund, creates instruments with which tosource such funds. By its nature, the types of funds sources in the moneymarket are largely debt or loan funds. The life span of such funds usuallyranges from few hours to about twenty-four months or two years.
10This is the financial market where short and medium term finances are soldand brought. The major reasons behind the establishment of the moneymarket in Nigeria.Money market instruments include the following - Treasury bills - Banking acceptance - Commercial papers - Certificate of deposit - Treasury bill (TBS): These are short term securities issued by the federal governments of Nigeria. They mature within two days from the date of issue and are default free. Instead of attracting interest, these promissory notes are sold at the discount. - Certificate of Deposit (COD): They are inter bank debit instrument meant to provide outlets for the commercial banks surplus funds. This scheme which was introduced in the country by the central bank of Nigeria in 1995 was meant to open up a new source of funds for the Merchant Bank. The two types of certificates of deposits are negotiable and non-negotiable certificate of deposit. - Commercial paper bills: These are promissory notes in various denominations, issued by the Central Bank of Nigeria with maturity
11 period of 50 to 270 days. Commercial bills may also be sold by major companies (Blue-chips) to obtain a loan. In this case, such notes are not backed by collateral; rather they rely on the high credit rating of the issuing companies.- Banker Acceptance: On introduction in 1975 by the central Bank, was originally meant to mop up excess liquidity in the banking system. It was aimed at broadening the market for federal government stock. And so commercial banks holding of the stock are accepted as a part of their specified liquid assets and are accepted as a part of their specified liquid assets and are accepted as a part of their specified liquid assets and are accepted as a part of their specified liquid assets and are accepted as a Part of their specified liquid assets and are repayable on demand. Under the BUF, Federal Government stocks of 3 years of less to maturity were designated Eligible Development stocks (EDS) for the purpose of meeting the bank’s specified liquid assets requirements. Capital Market: The capital market is a financial market where long- term financial market where long-term financial securities are traded on. It is a market that brings together suppliers and buyers of long-term finances for investment.
12 The Comparative study of the relationship price and firm profitability in capital market. Trend between stocks of companies and profitability.YEARS STOCKS PROFIT GROWTH GROWTH (N6000) RATE IN RATE IN STOCK. PROFIT. 1997 132073 702,986 - - 1998 176,096 727,363 33.3 3.5 1999 264,143 751,740 50 3.4 2000 264,143 1,064,168 0 41.6 2001 330,178 1,647,836 25 54.8 2002 375,315 2249078 13.7 34.5 2003 375315 2684927 0 19.4 2004 500420 2812623 33.3 4.8 2005 500420 27107221 0 -3.8 2006 550420 4665459 10 72Source: The Nigerian Stock Exchange fact book 2002.The Annual Report and Account of Cadbury 2006.The comparative Analysis of the share price and firms profitabilityof companies with Reference to Cadbury Nigeria plc.Between share price and profitability of Cadbury Nigeria plc. Year Growth Rate in share Growth Rate Profits. price 1997 - - 1998 -12 3.5 1999 -19.3 3.4
13 2000 20.8 41.6 2001 62.8 54.8 2002 -2 34.5 2003 113.3 19.4 2004 -8.6 4.8 2005 12 -3.8 2006 -45.1 10Source: The Annual Report and Accounts of Cadbury 2006.The Nigerian Stock Exchange fact book 2002 Newspapers.Trend Between share price and profitability of Nestle Nigeria plc. Year Growth Rate in share Growth Rate Profits. price 1997 - - 1998 -49.1 10.50 1999 -2.3 56 2000 136.1 28.6 2001 48.7 57.4 2002 25.1 25.8 2003 56.9 19.7 2004 13.6 0.8 2005 31.2 38.3
14 2006 20.9 6.7Source: The Annual Report and Accounts of Cadbury 2006.The Nigeria Stock Exchange fact book 2002 Newspapers.The Relationship Between share price and firms profitability. Year Growth Rate in Growth Rate share price Profits. 1997 22.9 703 1998 18.1 727 1999 14.6 752 2000 18.8 1064 2001 30.61 1648 2002 30.0 2249 2003 64.0 2685 2004 58.52 2813 2005 65.52 2711 2006 35.95 4665Sources: The Annual; Report and Accounts of Cadbury 2006. STThe Nigerian Stock Exchange fact book 2002 Newspaper (31 December ofeach year).The Relationship Between Earning per share and firmsprofitability. Years Earning per share. Profits. N000 1997 1.71 703
16x = Σx = 20017 = 2001.7 N 10y = Σy = 359 = 35.7 N 10FormularY = b o + b i xi + ESp = bo + b i p i + EWhere:bo = y - bi xbi = n Σxy – (Σy) (Σx) 2 2 n Σx – (Σx)bi = 10 (859943.31 – (359) (20017) 2 10 (54728183) – (20017)bi = 8599433.1 – 7186103 547281830 - 400680289bi = 1413330.1 14660541bi = 0.0096Also;
17bo = y - bi xbo = 35.9 – 0.0076 (28017)bo = 35.9 – 19.21632bo = 16.68368 = 16.684Sp = 16.684 + 0.0096 PL + 2The computation above signified that there is a significant relationshipbetween stock prices and firms profitability and it is a positive relationship. Thepartial coefficient of the regression line signifies that 0.0096% change in thefirm’s profitability can be associated with 1% change in stock price.Solving to get the coefficient of determination “12” we get the square root of 2R , that is R 2 2R = ( n Σxy – (Σx) (Σy) (Σy) 2 2 2 ( n Σx – (Σx) (Σy) ) 2R = R 2 2R = (10 (859943.31 –(20017) (359) 2 2 (10 (54728183) – (20017) (10 (16361.45 – (359) ) 2R i = ( 8599433.1 – 7186103) (547281830 – 400680289) (16361.45 – 128881)
18 2 2R = (1413330.1 ) (14660541) (34733.5) 2R = 0.3923R = 0.3923R = 0.6263Thus, from the computed R, the valve is 0.6263 of the total variation in thestock price can be explained by the profitability. Also the R calculated showsthat a positive relationship exists between profitability and stock price.Standard error testSolving to test for the statistical significant of the coefficient of a regressionline. 2 2Sbo = Σe (Σx) 2 (n-k-1) (nΣx 1 2Sbi = Σe 2 (n-k-1) (Σx 1) 2 2 2Σe = (1- R ) Σy 1 2Σe = (1-0.3923) (3473.34)
20Sbi = 2110.75 8x10x14660153.21Sbi = 2110.75 117281225.7Sbi = 0.0001799Sbi = 0.0134DECISION RULEIf the standard error test is less than a half of the numerical valve of bi i.e if Sbi 1< bi /2 accept Hi and reject Ho otherwise accept Ho and reject Hi. 1Therefore, since Sbi = 0.0132 > bi /2 = 0.0048 we however accept Ho andconclude that there is no significant relationship between stock price and firmsprofitability.T – TestSolving to test for the statistical significance of the regression coefficientprofitability.Formular
21tbo = bo Sbotbi = bi Sbitbo = 16.684 9.93Tbo = 1.680Also:tbi = 0.0096 0.0134tbi = 0.716at 5% level of significance t – tabulated = 0.05 = 0.251-0.025 = 0.975Degree of freedomn-k-iwhere;n = 10, k =110-1-1 =8t0.975 = 2.31
22hence,since t > tt i.e 0716 < 2.31. however, we accept Ho and reject Hi,measuring that the inclusion of profitability and stock price is notstatistically significant.SUMMARY OF FINDINGSThe study emphasized that stock price plays tremendous role in firmsprofitability using Cadbury Nigeria Plc as a case s study. The followingswere made: 1. There is significant relationship between stock prices and firms profitability. 2. There is equally a relationship between earning per share and firms profitability. 3. The fluctuation of the stock prices poses a lot of problems to the firms profitability. 4. Low level of market awareness pose a challenge to the Nigeria Stock Market which in turn affects forms profitability. 5. The regression result show that the t-test between profitability and stock price is 0.716 which means that the inclusion of profitability and stock price is not statistically significant.
23 6. Finally, on the other hand, a weak positive relationship exist between earning per share and profitability. 7. Since the coefficient of determination is at 0.95127. CONCLUSIONSthe study x-rayed the Nigerian Capital Market and its relationship with thefirms profitability suing Cadbury as area of the study and thus concludedthat stock prices and earning per share depends nearly on the firmsprofitability.Therefore, firms profitability has a positive relationship with stock pricesand earning per share meaning that firm will make enormous profit whenthe stock prices are favourable, while the reverse is the case when stockprices are unforvourable. RECOMMENDATIONSHaving clearly appraised a comparative study of the relationshipsbetween stock price performance and firm’s profitability: a case study ofCadbury Nigeria Plc. It is patient at this juncture to prefer some solutionsto these problems following the findings of the study.
24- Firms should be conscious of the development in the Nigerian Capital Market since their profitability depends heavily on the stock prices.- Government through the CBN should strengthen the laws guiding the operations of the Nigerian Capital Market to make it more dependable.- The NSE on conjunction with the SEC should make a deliberate attempt to increase the number of an improve the stock market.- The NCM should further decent realize its offices so that its gets more closer to investors and users of fund.- The NCM should as well intensify her public awareness programme in order to reach the unreached in the country.- Finally, improvement should be made on the infrastrutural problems that still plague the Nigerian Capital Market.
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