Determinants of Market price in Stock Market (Karachi Stock Exchange)

Hafiz Abdur Rashid (Corresponding Author)

Hailey College Of Commerce - Faculty of Commerce, University of the Punjab, Lahore- Pakistan Email: ha.rashid@hotmail.com

Zubair Ahsan
Hailey College of Commerce, University of the Punjab, Lahore- Pakistan Email: zubairahsan46@gmail.com

Abstract
The basic purpose of this study is to evaluate the relationship among the Market price of shares used as dependent variable and some others macro economic variables (Earning per share, Gross domestic product and Dividend) are used as independent variables. For this purpose KSE20 index is selected for the period from 2005-2010. Data is gathering from a group of 20 companies which are listed in Karachi stock exchange for the period of 6 years (2005-2010). To establish the relationship between variables (Stock price, Dividend, Gross demotic product& earning per share). A simple regression technique has been used.After applying the regression model the results are shows the positive and significant relationship between market price and independent variables Gross domestic product, Earning per share and dividend.

Keywords:Market price, Regression line, Dividend, Model, EPS.

1. Introduction:
Stock exchanges play an important role and also considered a most important part of the financial system of a country. Stock exchanges act as a channel and provide a place to the companies as a mean to raise capital and circulate its saving. Stock exchange can also provide a platform to those who wants to invest and who wants to borrow funds. The theories suggested that market price of the share is mostly depend on many factors such as Dividend per share, earning per share, payout ratio, interest rate etc. There are different approaches are used to determine the market price of the share. But in stock exchange share prices are determined by the market forces of supply and demand. In usual commodities the prices are determined at the equilibrium point. But in case of stock market other factors are also affected along with supply and demand forces. Sunde and Sanderson (2009) argued that the effected forces may be social, political and economic. In reality there are complex combination of factors are determined the market price. In short run many factors are affect in some situation. But at the end in long run supply and demand forces are set the rules of games. There are different factors like EPS, DPS and some other factors as interest rate inflection rate GDP are observed by the researcher to analyze the impact on stock price. For this purpose data are gather from KSE-20 random selected companies during the period from 2005-2010. The Remaining part of the article is structured as follows. The second segment is discussed on Literature reviews on determinants of market price in stock market. Data and methodology is discusses in segment 3. Segment 4 discusses on Result of analysis and in Last segment 5 discusses the conclusion of the research paper.

2. Literature Review:
In different countries many studies have attempt to explain the affect of micro & macro factors to determine the market price in different countries stock exchanges. Some of studies has summarize below as to review the previously done in this research area. Uddin (2009) provide a review on the determination of market price in Bangladesh stock exchange by using the data of bank leasing & Bangladesh insurance companies. The researcher used the data of 62 companies and gathers the data from annual reports during the December 2007- November 2008 time period. The companies are selected from the 86 companies which are listed on Dhaka stock exchange. The effect of independent variables Dividend Percentage, Net assets value per share and earnings per share were determined on market price dependent

variable using the two regression techniques linear function & logarithmic function. A linear relationship is shows in results between the dependent variable market price and independent variables dividend percentage, assets value per share and earnings per share. Al-Tamimi, Alwan & Rahman (2011) give a review on the determine the stock in financial markets of UAE. The researcher identified the some fundamental factors and some external factors. For the purpose of measure the correlation between the dependent variable (stock price) and independent variables (money supply, earning per share, interest rate, consumer price index, dividend per share, oil price & gross domestic product) a simple regression model was developed. Researchers found that the firms independent variables show the significant impact on dependent variables stock price. Ahmad, Ahmad, Khan & javaid (2012) analysis the relationship between macroeconomic variables and capturing the movements of stock price in Karachi stock exchange. The researchers used the ARMA model to see the movement in macroeconomics variables. The results are shows that the inflation & exchange rate are negative & significant effect on stock price. The results are also shows the positive and insignificant relationship between the money supply and stock price.

3. Data and Methodology

3.1.1. Data Sampling: The data is selected from Karachi Stock exchange. Author selected Twenty (20) Companies listed companies on Karachi stock exchange (20 Index) to evaluate the determinants of market price. These twenty companies are selected from all the major sectors of the country. Three variables GDP, EPS and Dividend are independent variables and Market price of (KSE20) Index Companys share price is used as dependent variable. 3.1.2. Hypotheses: Following hypothesis are create to test the study
Ho1:Earning per share and market price of the share are shows the Positive and

significant relationship.
Ho2:GDP (Gross Domestic Product) and market price of the share are shows the Positive and significant relationship. Ho3:Dividend and market price of the share are shows the Positive and significant relationship.

3.1.3. The Experimental Model: Model has been creating to test the above Hypotheses. SP=f(Div, EPS, GDP) SP represent Stock price. Div represent Dividend. EPS represent Earning per share. GDP represent Gross Domestic Product. Here the stock price shows as a function of Dividend, Earning per share and Gross Domestic Product. 3.1.4. Sampling of Data: For this study there are twenty companies are selected whose shares are traded in Karachi stock exchange. For this purpose the data is covered for the period from 2005-2010.

3.2. Variables:
3.2.1. Dividend: Dividends are paid by the companies to its shareholders from its profit. The companies Boards of Directors are paid dividend on Quarterly, Interim or annuallyits depending on company policy. 3.2.2. Earningsper Share (EPS) This variable can be calculate as EPS = (Net Income Preferred Stock) / No of outstanding shares 3.2.3. Gross Domestic Product (GDP) Absolute values and annual change in percentage are used.

4. Results & Discussion:

Market price is used as Dependent variable and EPS, GDP and DPS are used as independent variables. Dependent variable is regress with the independent variables. The regression results show the variation in dependent variable due to independent variables.

4.1 Statistics Summary: Table: 1 Variables Dividend EPS GDP MP Observations 120 120 120 120 Mean 179.9164 79.86966 18.21567 4.443333 Std. deviation 162.5684 85.53685 18.88832 1.627925 Minimum 9.44 0 -19.2 1.6 Maximum 796.96 525 93.76 6.2

Table: 2 R-squared Adjusted R-squared F-Statistic P-value SS(sum of squares residual) 0.6888 0.6808 85.59 0.0000 2166347.55

Table 2 shows that R-Squared value = 0.6888 which shows that there is a positive correlation between the independents and dependent variable. The increase in variables can also increase the R-Square. To solve the problem of R-square the Adjusted R-square is calculated and it is 0.6808 or 68.08%. This value shows that the 68.08% variation is due to its linear relation between dependent and independent variables. Table: 3 Variables
Constant DIV EPS GDP

Coefficients
11.27578 .7701563 4.41793 5.99841

Standard error
27.19444 .1294521 .593211 5.26059

t- value
0.41 5.95 7.45 1.14

p- value
0.679 0.000** 0.000** 0.257*

MP= 11.27578+0.7701563 Div +4.41793 EPS + 5.99841 GDP **At the level of 1%& *At the level of 5% is significance Table 3 shows the relationship between the dependent and independent variables. It shows that there is a positive relationship between the dividend and market price. It also shows that there is a positive relation relationship between the remaining variables (Earning per share & Gross domestic product) with market price.

5. Conclusion:
The economic forces supply & demand have a direct effect on stock price. Although the many other factors like imprecise no. of firm, other country factors and many industrial factors can also affect the supply & demand factors. Study has added in present literature in authenticate a new issues with some other factors which are influencing on stock price. Many researchers may recognize and test the non-economic factors which show the high (beta) constant that is not connected with present meltdown in Karachi stock exchange KSE-20 stock exchange market. The dependent variables which are gross domestic product, earning per share and dividend all the three factors have shown a positive effect of the market price. Factors which are show positively relation can be categorizing according the standardized betas that earning per share, gross domestic product and dividend respectively. After the results it is found that all the three variables show a significant effect on market price.

References:
Ahmad, Z., Ahmas, Z., Khan, S.M, Javid, U (2012).Capturing the stock price movements at Karachi Stock exchange: Are macroeconomic variables relevant? African Journal of Business Management, 6(8), 3026-3034. Christopher, R.O.S, Rufus, I.A, & Ezeliel, J.O.(2009).Determinants of Equity Prices in the Stock Markets. International Research Journal of Finance and Economics, 30 (2009), 177-189. Hussainey, K., & Ngoc, K.L. (2009).The impact of macroeconomic indicators on Vietnamese stock prices. The Journal of Risk Finance, 10(4), 321-332. Kraft, J., & Kraft, A.(1977).DETERMINANTS OF COMMON STOCK PRICES: A TIME SERIESANALYSIS.The Journal of Finance, 32(2), 417-425. Nazir, S.M, Nawaz, M.M, Anwar, W., & Ahmed, F. (2010). Determinants of Stock Price Volatility in Karachi Stock Exchange: The Mediating Role of Corporate Dividend Policy.International Research Journal of Finance and Economics, 55(2010), 100-107. Uddin, B.M. (2009). Determinants of market price of stock: A study on bank leasing and insurance companies of Bangladesh.Journal of Modern Accounting and Auditing, 5(7).

Determinants of Market price in Stock Market (Karachi Stock Exchange)

Name: Zubair Ahsan Roll Number: 248

Class:
B.com(Hons) 8th Semester Section: C (Morning) Contact: +92-345-4720044
Submitted To:

Prof. Hafiz Abdur Rashid

Subject:

Corporate Finance
HAILEY COLLEGE OF COMMERCE UNIVERSITY OF THE PUNJAB LAHORE