Firms; specific variables and_stock_returns_in_nepal_niyam_ mphi_lthesis2013_final


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Firms Specific Variables and Stock Returns In Nepal
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Firms; specific variables and_stock_returns_in_nepal_niyam_ mphi_lthesis2013_final

  1. 1. Firms’ Specific Variables andStock Returns in NepalNiyam Raj ShresthaExam Roll No.: 185/010TU Regd. No.: 24518/87M. Phil in ManagementTribhuvan UniversityPresentation on
  2. 2. Background• Different factors affect the stock returnsof the common stock• Average returns on stock of small firmswere higher than the average returns onstocks of large firms(Banz,1981).• Relevant to examine the existence offirms specific Variables in the Nepalesestock market6/7/2013 2
  3. 3. Issues• What are the relations between firms’ specificvariables and security returns for the firms in theNepalese context?• Is there any consistency in explanatory power ofthese variables and security returns whenconsidered individually and when consideredtogether?• How the shareholders of security market perceivepreference towards the stock market efficiencyand factors affecting stock returns in Nepal?6/7/2013 3
  4. 4. OBJECTIVES OF STUDY• To evaluate the effect of firms’ specific variables on stockreturns in Nepalese stock market– To analyze effect of size, earning yield, cash flow yield, book-to-marketequity and leverage on stock returns of financial institutions.– To assess the relationship between the firm size, earning yield, cashflow yield, book-to-market equity, leverage and security returns forfinancial institutions.– To evaluate whether the CAPM has the explanatory power inexplaining cross-section of stock returns in Nepal.– To determine which firm specific fundamental variable(s) havesignificant the explanatory power for stock returns.– To investigate the stakeholders’ efficiency towards security marketperceive preference towards the stock market efficiency and factorsaffecting stock returns in Nepal.6/7/2013 4
  5. 5. METHODOLOGY• Descriptive research design– Extreme size Percentiles portfolios as the small firms(size percentile 1) and big firms (size percentile 5)• Causal comparative research design-As Fama and French1992»MODEL Rit = α + b1t LMEit + b2t BE/MEit + b3t E/pit + b4t C/Pit ++ b5t LEVit + et ..........................................................( i ) Rit – RFt = i + bi [RMt – RFt] + eit ...........................( ii )6/7/2013 5
  6. 6. METHODOLOGY contd…Variables• Stock return (Rit)• Market return (RMt)• Risk-free rate (RFt)• Firm size (LME)• Book-to-market equity (BE/ME)• Earnings-to-price ratio (E/P)• Cash flow yield to price ratio (C/P)• Leverage ratio (A/ME and A/BE)6/7/2013 6
  7. 7. SAMPLE6/7/20137Distribution of Population and SampleListed Companies NSample No. ofObservationn %Commercial Banks 27 22 81.48 188Development Banks 76 41 53.95 138Finance Companies 73 59 80.82 320Total 176 122 69.32 646Source: NEPSE and data from SEBONTotal 122 sample firms for 646 observations for the period of 1999 and 2012
  8. 8. Major Findings• Portfolios Sorted by Size– Returns are in increasing trend– As size increases, the return also increases• Portfolios Sorted by Book-to-Market Ratio (BE/ME)– Inverse relation between stock returns and book-to-market equity ratio.– Increased in firms portfolio formed by book-to-market ratio the returns have decreased.6/7/2013 8
  9. 9. Major Findings• Portfolios Sorted by Earning to Price Ratio (E/P)– Returns are in decreasing trend– Lower E/P performed higher stock return• Portfolios Sorted by Cash Flow Yield Ratio (C/P)– Inverse relation between stock returns and cash flowyield ratio.– Firms return is in decreasing in trend.– Increased in firms portfolio percentile formed by cashflow yield ratio the return have decreased.6/7/2013 9
  10. 10. Major Findings• Portfolios Sorted by Market Leverage Ratio (A/ME)– Inverse Relation with stock return– Lower A/ME performed higher stock return• Portfolios Sorted by Book Leverage Ratio (A/BE)– Not strongly associated with stock return6/7/2013 10
  11. 11. Major Finding…contd…– Stock return and book-to-market equity ratio has negativerelation and book-to-market ratio is the most importantvariable to explain the impact on stock return– The returns and size of the firm has a positive relation– When combine all the variables except BE/ME, aresignificant and these variables are strong enough to explainthe impact on stock returns– Market leverage ratio has strong negative impact on stockreturns– E/P ratio is important variable to explain impact on stockreturn– Stock returns are significantly positively related with marketrisk factor6/7/2013 11
  12. 12. Major Finding…contd… (Primary Data)6/7/2013 12– Majority of the respondents do not analyze therisk while investing on the securities.– Right share of the company as a most affectingfactor for the determination of share price of thecompanies– The majority of the respondents buy shareswhen the stock price decreases and sells when itincreases– End of the fiscal year effect on share price is themajor seasonal effect in Nepali stock market
  13. 13. Concluding Remarks• Investment in stocks of large firms is profitable• The leverage variables (A/ME and A/BE ratios)have strong impact on stock returns.• Stocks with low BE/ME ratio are attractive inNepalese stock market– Firms which maintain low BE/ME ratio providehigher returns• Investors prefer to adopt an active strategy incommon stock investment.• Large numbers of macroeconomic variableswhich affect stock returns are recommended forthe further study6/7/2013 13
  14. 14. THANK YOU6/7/2013 14