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Boosting of nation's economic growth and solving the problem of underdeveloped economy is widely depends upon the nature of its economic infrastructure. One of the basic elements in achieving a selfreliant growth of the economy and for sustaining the desired level of economic development is an accelerated rate of investment or capital formation in the economy and the rate of investment or capital formation depends upon the efficiency of financial markets and institutions. The financial systems or markets perform this function by channeling the nation's saving into best uses. It does this by bringing together those who have surplus funds to lend and those who wish to borrow to finance their expenditures. This financial market is broadly classified as Money Market and Capital Market. Money market refers to a market where debt securities or less than one-year maturity are traded whereas capital market is the market for long-term debt and corporate stocks. The existence of an organized securities market is considered to be a pre-requisite for a modern free enterprise as well as for a mixed economy.

CHAPTER 1

Investment decisions are taken within the framework provided by a complex of financial institutions and intermediaries, which together comprise the capital market. Capital market means any body or individuals, whether incorporated or not, constituted for the purpose of regulating or controlling the business of buying selling or dealing in securities. (Bhalla, 1995: 21) It is just the market for capital funds. The word capital used in this context implies a long-term commitment on the part of the lender and long-term need for the funds on the part of the borrower. Both lenders and borrowers coming together in capital market to play effective financial intermediary role in primary and secondary market through the use of various long-term capital market instruments. It has a vital role in promoting efficiency and growth. It intermediates the

1

flow of funds from those who want to save a part of their income from those who want to invest in productive assets. It is the market, which provides the mechanism for channeling current savings into investment in productive facilities, that is, for allocating the countys capital resources among alternative uses. In effect, the capital market provides an economys link with the future, since current decisions regarding the allocation of capital resources are a major determining factor of tomorrows output. The capital market plays a crucial role in shaping the individual investment and portfolio decisions. Capital market consists of securities market and non-securities market. Securities markets implies mobilization of the funds through issuance of the securities like shares, bonds and debentures by corporate sector and bond, bills and debentures by government. These securities traded in the secondary market are generally negotiable and hence can be traded in the secondary markets. Non-securities market refers to the mobilization of the financial resources by the financial institutions in the form of deposits and loans. Primary and secondary markets are the two wings of the capital market. Primary market concerns with the issue of new companies stock whereas the secondary market deals with the previously issued shares. The majority of all capital market transactions occur in the secondary market. The proceeds from the sale of securities in this market do not go to the original issuer which means that it does not create new additional capital. In other words, securities are traded among the individual as well as institutional investors. The structure of capital market can be shown as follows: Chart:1.1: Structure of Capital Market

Capital Market

Non-Security Market

Bank Deposit Business Venture Fixed Assets Other Sectors

Security Market

Secondary Market

Debt Market

The force of supply and demand interacts to determine a stock market price. Prices move in trends because of an imbalance between supply and demand. When the supply of a stock is greater than the demand, the trend will be down as there are more sellers than buyers. When demand exceeds supply, prices tend to rise. There are essentially two concepts to explain the movement of stock price. They are i) ii) Technical Analysis Fundamental Analysis

In technical analysis, the analysis record historical financial data in charts, study these charts in an effort to find meaningful patterns, and use these patterns to predict future prices. Some charting techniques are used to predict the movements of a single security; some are used to predict the movements of a market index; and some are used to predict both the action of individual securities and the market action. Fundamentalists forecast stock prices on the basis of economic, industry, and company statistics. The principal decision variables ultimately take the form of earnings and dividends. The fundamentalist makes a judgment of the stock's value with risk return framework based upon earnings power and the economic environment. Fundamental analysis is an essential, core skill for any investor as well as it helps to evaluate a company on the basis of its sales, earnings, dividends, products, management and other economical and industrial outlook.

Basically, price of securities is determined by the interaction of demand and supply of corresponding securities. There are many other reasons that cause the stock price fluctuation. Major of them can be classified as

political

factors,

economic

factors,

socio-cultural

factors

and

technological factors. These variables may be closely related to the internal factors of the corresponding companies like the dividend policy of the company, business volume and profitability position of the company or to the external factors like the economic condition of the nation, governments monetary policy, political environment of the country etc. For this research purpose some important variables of these classified factors are taken and analyzed on the basis of primary as well as secondary data. As a whole, these major factors (internal and external) that affect the price of the security can be presented on the following chart:

-Dissolve of Parliament Political Factors - Ashoj-18, 2059 Event -5 Parties Movement - Maoist Insurgency (Cease fire, Peace talk and rupture of peace talk and re-starting of war) - Sep-11, 2001 event of New York - Maoist Insurgency - World-Wide Terrorism - Sep-11 event Economic Factors - Dividend Policy and profitability of the Company - Present Economic Condition - Interest Rate and Inflation - Tax System - Nepals Entry in WTO - Government Monetary Policy - Fiscal and Monetary Policy Stock Market Price Socio-Cultural Factors -Traditional Investment Procedure of Nepalese - Social Attitude and Beliefs toward Investment - Investors Knowledge on Stock Exchange

Technological Factors - Evolving of E-transaction - Information on Web - OTC market - Traditional Way of Transaction in NSE

Out of these factors or variables the following major events or variables have been taken for analyzing as research variables:

4

Ceasefire on Magh 15, 2059 (29-Jan, 2003) and starting of peacetalk 5 major political parties' movement during last seven months Rupture of peace-talk and re-starting war at Bhadra-10, 2060 (August-27, 2003) Nepal's entry in World Trade Organization (WTO) at Bhadra-25, 2060 (Sep-11, 2003).

The number of public limited companies is increasing tremendously in response to the economic liberalization and globalization policies adopted by the Nepalese government. Such institutions are provide banking services, insurance services and participating in developmental works, manufacturing and processing and other various service sectors. Although Nepals capital markets history is short, the concept of capital market is growing rapidly within a short span of time. It is mandatory to enlist the public limited companies in Nepal Stock Exchange (NEPSE) which creates liquidity on shares of such companies issued in the primary market and provides floor for trading of shares. Up to now, there are altogether 108 such companies, which are listed in NEPSE. (SEOBNAnnual Report, 2002/03: 8) Investors purchase the stocks of the companies through the primary market (initial offering) or through the secondary market. Most of these investors are not aware of the financial strength of the companies and they do not analyze companys financial indicators before they invest their funds through secondary market NEPSE. The market price of common stock (share) does not seem to be in accordance with the financial indicators Net Worth per Share (NWPS), Earning per Share (EPS), Dividend per Share (DPS) and last year's dividend. Instead, in determination of the market price of share, there has been major influence of rumors rather than strength of the companies. The Market Price per Share (MPS) of commercial banks, especially foreign joint

venture Banks' has been much higher than MPS of other sectors. Moreover, the overall NEPSE is depended upon MPS of such companies. Generally, the trend is that the MPS of public quoted companies is above their book value. The market value is determined by the supply and demand functions. However, in an efficient market MPS fully reflects all the historical information publicly available. Here arises the question of efficiency of the Nepalese share market. The high movement of share prices may be the outcome of the efficient market behavior. An article in Spot Light states that "our stock market is not efficient enough since all the listed companies do not make past information available to shareholders. Many listed companies do not produce timely financial statement or annual reports to the investors. The dubious and hazardous movement of share prices has no sound fundamental backing of analysis and relationship to past results revealed in limited calculated dividend yield, net worth and price multiples. The investors conclude that there has been a foul play using inside information. The reaction is based on the assumption of strong form of the market efficiency. The Security Exchange Act strictly prohibits the misuse of inside information but the regulating authorities can make no advance notice of how there is the use of inside information" (Subedi, 2002: 5). It denotes that every investor should be well aware of the degree of risks in which they are investing or going to invest their saving funds. There are very few practices of analyzing this aspect in the Nepalese context. Most of the investors are investing their funds haphazardly without considering risk involved in their investments. Thats why the major issues might be whether the MPS of listed companies, especially for selected companies, are really representing the financial indicators, i.e. NWPS, EPS, and DPS etc. More specifically, the research questions are:

1.

What are the major financial indicators which have major influence on determining the MPS?

6

2.

Is there any specific relationship of MPS with fundamental financial indicators (EPS, NWPS, DPS, and current years dividend) or is the trend of MPS running in accordance with these financial indicators? Are the common stocks of the sampled companies are equilibriumpriced? How much the signaling and informational factors affect the share price? Whether the investors are aware of the trend of financial indicators which have major influence on determining MPS and how much the investor rational in terms of investment return of the common stocks investment?

3.

4.

5.

1.

To

identify

of

major

financial

indicators

which

affects

on

2.

To examine and evaluate the relationship of MPS with various financial indicators like; EPS, NWPS, DPS and current years dividend.

3. To identify whether stocks of the sampled companies are overpriced, under-priced or equilibrium priced. 4. To study the signaling and informational effect on share price.

5.

The study will have some limitations. Basically the study is done for the partial fulfillment of masters of business studies. Time constraints, financial problem and lack of research experience will be the primary limitation and other limitations are as follows:

1.

The study will confine only to Nepal Stock Exchange and its

members.

7

2.

ten companies of financial indicators, five from private joint venture banks and three from selected finance companies and rest two from insurance companies among the companies in the NEPSE. Due to the lack of data other sectors can not be used.

3.

which have been collected from books, financial statement and report of the Security Board of Nepal (SEBON) and Nepal Stock Exchange and selected company's' annual report, company's web site and other publications. The study covers the information of only few fiscal years' data. 4. 5. Foreign information and rules affecting the share market is Studies and reference were also extremely limited in the ignored. prospective of Nepalese stock market.

On the basis of the earlier stated variables and events which affect the price of securities, the following hypotheses have been set:

1.

Null Hypothesis: There is no significant change in share price before and after the Ashwin-18, 2059 (4-Oct, 2002) event. Alternative Hypothesis: There is significant change in share price before and after the Ashwin-18, 2059 (4-Oct, 2002) event.

2.

Null Hypothesis: There is no significant change in share price before and after the Ceasefire on Magh 15, 2059 (29-Jan, 2003) and starting of peace-talk. Alternative Hypothesis: There is significant change in share price before and after the Ceasefire on Magh 15, 2059 (29-Jan, 2003) and starting of peace-talk.

3.

Null Hypothesis: There is no significant change in share price before and after the five major political parties' movement.

Alternative Hypothesis: There is significant change in share price before and after the five major political parties' movement.

4.

Null Hypothesis: There is no significant change in share price before and after the rupture of peace-talk and re-starting war at Bhadra-10, 2060 (August-27, 2003). Alternative Hypothesis: There is significant change in share price before and after the rupture of peace-talk and re-starting war at Bhadra-10, 2060 (August-27, 2003).

5.

Null Hypothesis: There is no significant change in share price before and after Nepal's entry on WTO on Bhadra-25, 2060 (Sep11, 2003). Alternative Hypothesis: There is significant change in share price before and after the Nepal's entry on WTO on Bhadra-25, 2060 (Sep-11, 2003).

Chapter 1: First chapter deals

The whole study will be divided into following five chapters: with introduction. This includes background, statement of problem, objectives of the study, limitation of the study and organization of the study. Chapter II: Second chapter deals with the review of available literature. It includes review of previous unpublished Master degree thesis, books, journals, articles etc. Chapter III: Third chapter explains the research methodology used in the study. It includes research design, population and sampling, sources of data, method of data analysis and research variables etc. Chapter IV: Chapter V: This chapter includes the brief outline of stock market in Nepal. The fifth chapter, the important chapter of the study will be the presentation & analysis of data.

Chapter VI:

The sixth & last chapter summarizes the main conclusion that flows from the study and offers suggestion for further improvement and conclusion of the study.

10

CHAPTER - 2

REVIEW OF LITERATURE

The basic concern of the study is to focus on the pricing behaviour of the stocks of the companies listed in Nepalese Stock Exchange. So, in this chapter, an attempt is made to review some of the literature concerning the stock market in Nepal and aboard as well as the market price behaviour. The price behaviour of the stock and its trading activity has got the tremendous concentration in security investment. So, a better understanding of these determinants may increase investors' confidence in the stock market and thereby enhance the effectiveness of corporate resource allocation. Hence more and more concerns over pricing behaviour are arising and most of the concerned books bear some paragraph on this issue.

2.1.1 Capital Market: A place where long term lending and borrowing takes place is known as capital market. Therefore, the capital market is the market for long term borrowing and lending. The primary instruments of the capital market are stock and bonds (equity and debts). Therefore it includes both the new issue market and the old market. Capital market is concerned with long term finance; widely it consists of series of channels through which the saving of the community are made available for industrial and commercial enterprises and authorities. It is concerned with that private saving, individual as well as corporate, that are turned into investment through new capital issue and also new public loan floated by government and semi government bodies. In capital market demands for funds comes from agriculture, industry, trade and government while the supply of funds comes from individual or corporate savings, institutional investors and surplus of government. The history of capital market is not so old for Nepalese context. The Capital Market was developed by the establishment of Security Exchange Center on 2033 B.S. The number of listed companies and their

11

trading was very negligible until the government of Nepal has made economic reforms along with broad financial policy in the process of economic liberalization. The privatization of public entities has been started and various banking and finance companies as well as other companies in the private sector are being established with local and foreign investments. As they were established as public companies, these companies have to issue some of their share of the general public. So, the development of the security market in Nepal takes its pace only the establishment of these banking and finance companies. 2.1.2 Security Market: Security Market interchangeably known as the integral part of capital market is in fact basis of the economy of a country. The most effective use of idle and surplus resources can be brought into practice only by means of market mechanism. Security market, a structural network of savers and users of fund, is such a market mechanism which mobilized the fund of savers to the users and thus this financialization boosts the industrialization and trading activities, which will bring the positive result to the economy as a whole. (Sharma, 2002:16) There are two important functions of securities market, namely the raising of funds in form of shares and debentures and trading in the securities already issued by companies. While the first aspect is obviously much more important from the point of view of economic growth, the second aspects is also considerably important. In fact, if facilities for transferring of existing securities are abundant, the raising of new capital is considered assisted as the buyer of a new issue of security become confident that whenever he wants to get cash he can find a buyer of the security without much difficulty. This aspect is called the liquidity of the stock market. Thus the liquidity of the stock market affects the raising of new capital from the market. (Levine, 1992: 33) Security market sets a price for the securities it trades and makes it easy for people to trade them. Securities market facilitates the sale and resale of transferable securities. The security market can be defined as a

12

mechanism for bringing together buyer and sellers of financial assets to facilitate trading. Securities market is classified into two; the market in which new securities are sold is called the primary market and the market in which existing securities are resold is called the secondary market. Secondary markets are created by brokers, dealers and market makers. Brokers bring buyer and seller together with themselves actually buying or selling; dealers set price at which they themselves are ready to buy and sell (bid and ask price respectively). Broker and dealer come together organized market or in stock exchange. (Gitman, 1992: 457) 2.1.3 Stock Exchange: The stock exchange is an institution where quoted securities are exchanged between buyers and sellers. The stock exchange provides market in a wide range of traded securities, generally of medium to longterm maturities, issued by companies, government and public organizations. (Winfield, 1985: 22) Most of the investors are attracted to the equity shares because of its marketability and liquidity. One may like to buy more shares or selling existing shares from time to time when he is in need of money or when he wants to shuffle his portfolio. Since the stock exchange is a place where a large number of buyers and sellers congregate, one can, by and large, easily find his counterpart for sale or purchase of shares. The investor can convert his shares into cash at the prevailing market prices readily. The existence of a stock exchange facilitates all these functions without which it is almost impossible to do so. The key function of securities exchange is to create a continuous market for securities at a price that is not very different from the price at which they were previously sold. The continuity of securities market provides the liquidity necessary to attract investor's funds. Without exchanges, investors might have to hold debt securities to maturity and equity securities indefinitely. It is doubtful that many people would be willing to invest under such conditions. A continuous market also reduces the

13

volatility of security prices further enhancing liquidity. (Gitman, 1992: 458) The securities exchanges help to allocate scare fund to the best uses. That is by disclosing the price behavior of securities and requiring the disclosure of certain corporate financial data; they allow investors to access the securities risk and return and to move their fund into the promising investments. An efficient market is one that allocates fund to the most productive uses. Along with this, there is lot of functions of security exchange such as ready market and continuous market, evaluation of securities, safety of transactions, canalization of savings and widening the share ownership etc. However, besides these functions, there are three things a security exchange must do: Determine a fair price for the securities it trades or price discovery function. Enable transaction to be made at as low cost as possible or minimization of transaction cost. Enable transaction to be made at this price quickly and easily or provision for liquidity.

Main Function of Stock Exchange: Price Discovery Security is a legal representation of the right to receive future benefits under conditions. Its value depends on expectation of the amount of those benefits and evaluation of risk involved. Expectation and evaluation reflect both the information available and the conclusions people draw from that information. Since the market may quite big, no single buyer or seller can influence the price of a share to any significant extent. Price discovery is the process of arriving at fair prices for securities. Fair price indicates the compromise between fair offer price (lowest price at which any well informed trader willing to sell) and fair bid price (highest price any well informed buyer is willing to pay). Different markets do this in different way and different ways of organizing a market affect how closely the market approaches the ideal of fair prices. However, a very

14

important fact that should not be forgotten is the concept of ideal market or market efficiency, which also the necessary pre-condition for approaching to the fair price. In an ideal market value of securities equal its price of securities and prices reflects all available information about the market. In the securities market there is a great importance of demand and supply for price fixation. The price of a given stock is determined exclusively by the interacting forces of supply and demand converting on such stock at a given time, that the price and volumes of its past transactions are meaningful indications of the probable relationship of the future and demand pressure it is likely to encounter in the market and that such relationship is the most important element in determining the probable direction of the price movements. (Ackerman, 1980: 85) The stock exchange produces, through its continuous process of evaluation, prices of securities, as close as possible to investment value based on present and future income yielding prospects of various enterprises, capitalized at 'notional rate of interest' the rate which will prevail if and when all the liquid savings are employed into productive purposes. (Gupta, 1982: 148)

2.1.4 Price Determination: The share price is determined in the floor by the interaction of market forces i.e. demand and supply. The price is determined by the point of equilibrium between supply and demand, the shifting of this balance results in incessant adjusting of price in search of the ever-changing new equilibrium. Then market price moves upward and downward. There are many other reasons that causes the stock price fluctuation, major of them are economic, non-economic and market factors. Dividend is the most important factors on the determination of stock price. Dividends are strongly influenced by the earnings power of the

15

firm. There is a very close correlation between corporate earnings & dividends. Earning power, in turn, is strongly influenced by interest rates. In this way, the most fundamental factor in stock price fluctuation lies in changes in corporate earnings, which together with interest rates and business cycle trends, contribute to making up the economic factors influencing stock price. The next influencing factors are non-economic factors, including changes in political conditions, such as administrative changes, change in the weather and other natural conditions, and changes in cultural conditions, such as technological advance and the like. Similarly the other influencing factors are market factors, or internal factors of the market, considering of the tone of the market and supply-demand relations, may be cited as the third category, that influences the stock prices. Besides these factors the of stock prices are influenced by the corporate the performance of the market. 2.1.5 Theory of Price Behavior The forces of supply and demand interact to determine a stock market price. If demand is high and supply is low then the price of stock goes up and vice-versa. There are essentially two schools of thought to explain the stock price behavior. They are:i) ii) Inefficient Market Theory Efficient Market Theory the company, companys policy regarding

Inefficient Market Theory: Conventional approach has considered that market is inefficient, which includes technical analysis theory. Prior to the development of the efficient market theory, investors were generally divided into two groups, Fundamentalists and Technicians. (Reilly, 1986: 347) The two groups are analyzed as follows: Technical Analysis

16

Technical analysis is based on the widely accepted premise that security prices are determined by the supply of and demand for securities. The tools of technical analysis are therefore designed to measure supply and demand. Typically, technical analysts record historical financial data on charts, study these charts in an effort to find meaningful patterns to predict future prices. Some charting techniques are used to predict the movements of a single security; some are used to predict the movements of a market index; and some are used to predict both the action of individual securities and the market action. The basic assumptions underlying technical analysis are listed below: Market value is determined solely by the interaction of supply and demand. Supply and demand is governed by numerous factors, both rational and irrational. Aside from the effected of minor fluctuations in the market, stock prices tend to move in trends that persist for appreciable lengths of time. Changes in trends are caused by shifts in supply and demand. Shifts in supply and demand, no matter why they occur, can be detected sooner or later in charts of market action. Some chart patterns tend to recur, and these recurring patterns can be used to forecast price movements. Technical theory involves study of the past volume and price data of the securities to predict future price fluctuations. Technical analysis theory of share price behavior is based on past market information. On the assumption that history tends to repeat itself, it is believed that knowledge of past patterns of share prices will help to predict future prices under similar circumstances. It involves the study of past market behavior with reference to various financial and economic variables are to forecast the future. The changes occur in financial and economic variables are to be adjusted in the light of the present situation. Technical analysts or chartist, as they are commonly called, believe that they can discern patterns in price or volume movements, and that by

17

observing and studying the past behavior patterns of given stocks, they can use this accumulated historical information to predict the future price movements in the security. Technical analysis comprises many different subjective approaches, but all have one thing in common that is, belief that these past movements are very useful in predicting future movements. Technical analyst believes in the theory behind chart formations and patterns. They read charts much like ancient astrologers read the stars, looking for "head and shoulders" formations. These, they believe, reflect the patterns of buying and selling, accumulation and distribution, or market psychology. Stock prices always move in trends because of an imbalance between supply and demand. When the supply of a stock is greater than the demand, the trend will be down as there are more sellers than buyers; when demand exceeds supply, the trend will be up as buyers "bid up" the price; and if the forces of supply and demand are nearly equal, the market will move sideways in what is called a "trading range". Eventually, new information will enter the market and the market will begin to trend again either up or down, depending on whether the new information is taken as positive or negative. Trend which are very brief are called minor trends; those lasting a few weeks are known as intermediate trends; and trends lasting for a period of months are major trends. By analyzing trend lines we can determine what trend is in force. It helps us to act safe in market both in bullish and bearish market. Price moves in trends. A trend indicates there exist an inequality between the forces of supply and demand. Such changes in the forces of supply and demand are usually readily identifiable by the action of the market itself as displayed in the prices. Certain patterns or formations that appear on the charts have a meaning and can be interpreted in terms of probable future trend development. Dow Theory The Dow Theory is one of the oldest and most famous technical tools and was originated by Charles Dow, who founded the Dow-Jones

18

Company and was the editor of The Wall Street Journal around 1900. The Dow Theory is used to predict traversal and trends in the market as a whole or for individual securities. According to Charles Dow, the market is always considered as having three movements, all going at the same time. The first is the narrow movement form day to day. The second is the short-swing, running from two weeks to a month or more; the third is the main movement covering at least four years in duration. Dow Theory practitioners refer to these three components as:

1.

Primary Trends: They are commonly called bear or bull markets. Delineating primary trends is the primary goal of the DOW theorists. Secondary Movements: Secondary movements are sometimes called corrections which last only a few months. Tertiary Movements: These are simply the daily fluctuations. The Dow Theory asserts that daily fluctuations are essentially meaningless random wiggles. Nonetheless, the chartists should plot the asset's price or the market average each day in order to trace out the primary and secondary trends. (Francis, 1986: 524)

2.

3.

Fundamental Analysis Fundamental analysis approach involves working to analyze different factors such as economic influences, industry factor, governmental actions, firms financial statement, its competitor and pertinent company information like product demand, earnings, dividends and management in order to calculate an intrinsic value for firms securities. The analyst who believes on fundamental facts to determine the intrinsic value of stock is popularly known as fundamental analyst or fundamentalist. Fundamentalists forecast stock price on the basis of economic, industry and company statistic. The principal decision variables ultimately take form of earrings and value with as risk- return framework based upon earning power and the economic environment. Fundamental analysts believe into companies earnings, their management, economic outlook, firms competitor's market conditions and many other factors. (ibid)

19

The objective of fundamental security analysis is to appraise the intrinsic value of a security. The intrinsic value is the true economic work of financial assets. The fundamentalists maintain that any points of time every stock has an intrinsic value, which should in principle be equal to the present value of the future stream of income from that stock discounted at an appropriate risk related rate of interest(Bhalla, 1983: 283). Therefore the actual price of security is considered to be a function of a set of anticipation. Price changes as anticipation changes which in turn change, as a result of new information. In other words; a new piece of news is released, securities market prices will adjust towards the new values. The value of common stock is simply the present value of all the future income which the owner of the share will receive(Francis,1986: 398). And the actual price should reflect intrinsic value of the stock i.e. good anticipation of cash flows and capitalization rate corresponding to future time period. But in practice, first it is not known in advance what the appropriate discount rate should be for a particular stock. Therefore fundamentalists estimate their intrinsic value by studying in detail of all matters that is relevant to company. There are various models developed by fundamentalists to reflect the price of the securities. Some of them are as follows: Capital Assets Pricing Model (CAPM) The basic foundation of the theory was laid down in the microeconomics studies of mean variance choice by Mrkowitz (1959) and Tobin (1958). The critical extension to equilibrium in the capital market, and the development of the CAPM, was accomplished by Sharpe(1964) and Lintner (1965) (Stephen, 1978: 886). Like the portfolio models of Markowitz and Tobin, the Sharpe-Lintner asset pricing model assumes a market of risk-averse consumers who can make portfolio decisions on the basis of the means and standard deviations of one period portfolio returns, implicitly assuming that these standard deviations exist (Fama, 1971: 30). The CAPM substantiated the idea that, in competitive

20

equilibrium, assets earn premium over the risk less rate that increase with their risk, by showing that the determining influence on risk premium is the covariance between the asset and the market portfolio, rather the own or intrinsic risk of the asset.(Stephen, 1978: 886) CAPM is concerned with two key questions: What is the relationship between risk and return for an efficient portfolio? What is the relationship between risk and return for an individual security? The CAPM is based on the following assumptions:

Individuals are risk averse Individuals seek to maximize the expected Individuals have homogeneous expectations

utility of their portfolios over a single period planning horizon. they have identical subjective estimates if the means, variances and co-variances among returns, expected returns & standard deviations. Individuals can borrow and lend freely at a The market is perfect; there are no taxes, risk free rate of interest. there are no transaction costs; securities are completely divisible; the market is competitive. is given. Gordens model: As per the Gordens model about relationship of dividend policy and stock price, investors are not indifferent between current dividends and retention of earnings. An increase in dividend payout ratio leads to increase in the stock prices for the reason that investors consider the dividend yield is less risky than the expected capital gain. Similarly investors required rate of return increases as the amount of dividend The quantity of risky securities in the market

21

decreases. This means that there exists a positive relationship between the amount of dividend and the stock prices.

The model is based on the following assumptions: The firm is an all-equity firm. No external financing is available. Internal rate of return (r), appropriate discount rate (Ke) are constant. The firm and its stream of earnings are perpetual. The corporate tax, do not exist. The retention ratio (b) once decided upon is constant. Thus the growth rate (g=br) is constant forever. The discount rate is greater than growth rate, K>g.

As per this model, the relationship between stock price and dividend varies on the following stages:

a) Growth

to decline in correspondence with increase in payout ratio or decrease in payout ratio or decrease in retention ratio. It means high dividend leads to increase in share prices. Therefore dividends and stock price are negatively correlated in such firms.

b) Normal

regardless of change in dividend. It means dividend and stock price are free from each other in normal firm.

c) Declining

Firm

(r<k): The

share

price

tends to

rise in

correspondence with rise in dividend payout ratio. It means dividend and stock prices are positively correlated with each other in a declining firm. J. E. Walters model: As per the study of J. E. Walter on the relationship of dividend and stock price, dividend policy of a firm affects its stock price. The relationship between firms internal rate of return and cost of capital are the determining factors to retain profits or distribution of dividend. The stock price will be increased with the increase in the retention ratio of the firm

22

when the internal rate of return is greater than the cost of capital. Thus, as per Walter zero dividend policy will maximize the market value of share for growth firms. Assumptions of Walters model: Retained earnings constitute the exclusive sources of financing. The firm does resort to debt or equity financing. The firms internal rate of return and its cost of capital are constant. Value of earning per share (EPS) and dividend per share (DPS) are remain constant. The firm has perpetual life. The firm distributes its entire earnings or retains it for immediate reinvestment. The relationship between stock price and dividend varies on the following stages:

a)

Growth Firm (r>k): If the firms internal rate of return exceeds the cost of capital such firms are known as growth firms. The relationship between dividend and stock price is negative on such firms. It means that more dividend leads to decrease in stock price and zero dividend will maximize the market value of shares for such growth firms. Normal Firm (r=k): If the firms internal rate of return and cost of capital are equal, such firms are called normal firms and there is no role of dividend on such firms stock price. Dividend payout ratio does not affect the value of share whether the firm retains the profit or distributes dividend. Declining Firm (r<k): If the firms internal rate of return is less than cost of capital, such firms are known as declining firms. The relationship between dividend and stock price is positive that is increase in dividend per share leads to increase in stock price of such firms.

b)

c)

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Thus, Walter concluded that when the firm is in growth stage then dividend is negatively correlated with price of share. Similarly, in normal firm there is no relationship between dividend and stock price. In the same way, there is positive relationship between dividend and price of stock in declining stage of firm. Efficient Market Theory: In a competitive market, the equilibrium price of any goods or services at a particular movement in time is such that the available supply is equated to the aggregate demand. This price represents a consensus of the members trading in the market about the true worth of the good or service, based on all publicly available information. As soon as a new piece of relevant information becomes available, it is analyzed and interpreted by the market. The result is a possible change in the existing equilibrium price. The new equilibrium price will hold until yet another bit of information is available for analysis and interpretation. The role of information is two-fold: (a) to aid in establishing a set of security prices, such that there exist an optimal allocation of resources among firms and an optimal allocation of securities among investors, and (b) to aid the individual investor, who faces a given set of prices, in the selection of an optimal portfolio of securities. (Sharma, 2002: 27) The word Efficiency as applied to securities market has unfortunately been used to represent a variety of logically distinct concepts. In particular it means: a) exchange efficiency (b) production efficiency and (c) information efficiency. In this study, it is concerned only with informational efficiency. In an efficient market security prices fully reflect available information (Fama, 1976: 133). Regardless of the form of information, it is the key to the determination of stock prices; therefore, it is the central issue of the efficient market concept. An efficient market can exist if the following events occur: 1) A large number of rational, profit maximizing investors exist who actively participate in the market by analyzing, valuing and trading

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stocks. These investors are price takers; that is, one participant alone can not affect the price of a security. 2) Information is free of cost and widely available to market participants at approximately the same time. 3) Information is generated in a random fashion such that announcements are basically independent of one another.

4)

Investors react quickly and accurately to the new information, causing stock prices to adjust accordingly. (Charles, 1943: 425)

In such a market, the current prices of a security obviously Fully Reflect all available information. Similarly, in a perfect and competitive economy compared of rational individual with homogeneous beliefs about future prices, by any meaningful definition present security prices must fully reflect all available information about future prices. (Rubinstien, 1975: 812) In an efficient market, market participants, acting in their own selfinterest, use available information to attempt to secure more desirable (higher returns, ceteris paribus) portfolio position. In doing so they collectively ensure that price movements in response to new information are instantaneous and unbiased and will fully reflect all relevant information. Competition among participants to secure useful information will drive security prices form one equilibrium level to another so that the change in price in response to new information will be independent of the prior change in price. Price change will be random walk in response to the information. In an idle efficient market, every one knows all possible-to-know information simultaneously, interprets it similarly, and behaves rationally. (Bhalla, 1974: 2). In such a world, the only price change that would occur is due to the result from new information. An initial and very important premise of an efficient market is that there are large numbers of knowledgeable and profit maximizing investors adjust the information rapidly. (Reilly, 1986: 166) The degree of market efficiency has important implications for the economy and for the investment

25

decision-makers. In an economic sense, it is important that security prices provide accurate signals that can be used to allocate capital resources correctly. Mis-priced security result in incorrect allocation of capital. (Cheney, 1997: 746) In such a market, all prices are correctly stated and there are no bargains in the stock market. Efficiency in this context means the ability of the capital markets to function so that prices of securities react rapidly to new information. Such efficiency will produce prices that are appropriate in terms of current knowledge, and investors will be less likely to make unwise investments. A corollary is that investors will also be less likely to discover great bargains and thereby earn extraordinary high rates of return. (Bhalla, 1974: 3) The conclusion is that In an efficient market there are neither free lunches nor expensive dinners. It is not possible to systematically gain or lose abnormal profits from trading on the basis of available information. (Weston and Copland, 1996: 93-94). No one can consistently do better than the average. Efficient market theorists believe that some do better then average because of luck. In fact they suggest that the traders those who buy and sell their stocks frequently do less well than the stock market averages by an amount equal to the commissions they pay. (Rubinstien, 1975: 815) One set of test of market efficiency examines the informational efficiency of security prices. Existing model of efficient markets imply that all relevant information regarding given stock is reflected in its current market price. This notion of market efficiency can be divided into three categories based on type of information used in making market decisions. They are explained as follows:

a)

Weak Form Market Efficiency: Weak form market efficiency hypothesizes that todays security prices fully reflect all information contained in historical security prices. This implies that no investor can earn excess returns by developing trading rules

26

based on historical price or return information (Weston and Copland, 1996: 94)

b)

Semi-strong Form Market Efficiency: It says that security prices fully reflect all publicly available information. Thus, no investors could earn excess return using publicly available resources such as corporate annual reports, NEPSE price information or published investment advisory reports. It contains all publicly available data such as earnings, dividends, stock split announcements, new products development, financing difficulties and accounting changes. A market that quickly incorporates all such information into prices is said to be semi-strong efficient. If the semi-strong hypothesis is true, then only a few than what could be earned by using a nave buy-and-hold strategy. (Francis, 1986: 608) Strong Form Market Efficiency: The most stringent form of market efficiency is the strong form, which asserts that prices fully reflect all information, public and non public. (Jones, 1943: 429) In such kind of market, no group or investors should be able to earn, over a reasonable period of time, excess rates of return by using publicly available information in a superior manner. An extreme version of the strong form holds that all non public information, including information that may be restricted to certain groups such as corporate insiders and specialists on the exchanges, is immediately reflected in prices. In effect, this version refers to monopolistic access to information by certain market participants. (ibid) Chart: 2.1 : Market Efficiency in Three Information Level Strong Form

All Information Semi-Strong Form Public Information

c)

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These three hypotheses are not mutually exclusive; they differ only in the degree of market efficiency. It is notable point that a semi-strong efficient market encompasses the weak form of the hypothesis because price and volume data are part of the larger set of all publicly available information. Strong-form efficiency encompasses the weak and semistrong forms and represents the highest level of market efficiency. It is necessary for the weak form hypothesis to be true in order to the semistrong and strong form hypothesis to be true.

Numbers of research studies have been performed internationally on the stock market. Some of them are as follows: In 1900, Louis Bachelier first tested the random walk model. He tested the model in commodity prices and found that those prices followed a random walk. He presented the evidence that the commodity speculation in France was a fair game. He also concluded that the current price of a commodity was an unbiased estimate of its future price. After the discovery of this model, large numbers of studies have been done throughout the world. In 1927, Slutsky proved that the randomly generated price changes look like stock price changed and that they appear to exhibit cycles and other patterns. In 1933, Alfered Cowels found little evidence that stock market analysis could predict future prices. In 1937, Alfered Cowels and Herbert E. Jones reported that stock prices moved with predictable trends. They gave a controversy to the random

28

walk model as valid share price behavior model in USA. This finding remained a challenge against the random walk hypothesis for more than two decades. In 1953, Kendall made significant contribution to advance in the study of the random walk model. He tested the model on the weekly price changes of the 19 indices of British industrial shares and in the spot price series of cotton (New York) and wheat (Chicago). He analyzed the data by serial correlation coefficient and concluded that the subsequent stock price movement forms random walk. He showed that the successive price changes are statistically independent to its past price changes. In 1959, H.V. Roberts carried out simulation tests by comparing the simulation of random numbers and the Dow Jones Industrial Average Index (DJIA) for about one year starting from Dec-30, 1995 to Dec-28, 1956 and found similarity between these two series. He further observed that the first difference of these two series produce the same pattern. His work was significant in that he gave a number of methodological suggestions for testing what he calls the chance model. In particular, he suggested runs analysis for testing independence of price changes. Moore (1962) studied weekly price changes of 30 randomly selected stocks for the period 1951 to 1958 and found an average serial correlation coefficient 1.06. The value was extremely low and indicated that the weekly change data had almost no power in predicting future prices changes. Fama's study (1965) on the random walk model was one of the best definitive and comprehensive ever study conducted. He observed the daily proportionate prices of each 30 individual stocks of the Dow Jones Industrial Average. The time periods covered started from end of 1957 to 26th, September 1962. He employed the statistical tools such as serial correlation and runs tests to draw inference about dependence of the price series. He calculated auto correlation coefficient for daily change in

29

log price series. He calculated auto correlation coefficient for daily change in log prices for lag from 1 to 30 and found that the coefficient for daily changes in average was +0.30, which is near to zero. But on the daily price change in log prices for lag from 1 to 30 and found that the coefficient for daily changes in average of +0.30, which is near to zero. But on the daily price changes, 11 out of 30 stocks had correlation coefficient more than twice their computed standard errors. The coefficients ranged from smallest 0.06 to the largest 0.123. However, Fama concluded, "Dependence as such as a small order of magnitude is from a practical point of view, probably unimportant for both the statistician and the investor". He also calculated serial correlation for lag from 1 to10 for non-overlapping differencing intervals of four, nine and sixteen days to examine the possibility if price change across longer interval show dependence. All the results are again not significantly different from zero. Roa and Mukherjee (1971) applied spectral analysis to weekly prices of an aluminum company's share and found no evidence contrary to random walk model. Fama and French (1998) pushed the common expected returns argument for market efficiency one step further. They argued that there are systematic patterns in the variation of expected returns through time that suggested that it is rational. They find that the variation in expected returns tracked by D/P or the default spread (the slopes in the regressions of returns on D/P or the default spread) increase from high grade bonds to low grade bonds, from bonds to stocks, and from large stocks to small stocks. This ordering corresponds to intuition about the risks of the securities. On the other hand, the variation in expected returns tracked by the term spread is similar for all long term securities (bonds and stocks), which suggests that it reflects variation in a common premium for maturity risks. (Fama, 1991: 1584) C.B. Gupta had commented that the capital market serves as a link between suppliers and users of finance. It is a mechanism for the

30

mobilization of public savings and channeling them in productive investments (Gupta, 1978: 325). Thus capital market works as a powerful medium between potential investors and users of finance. Formally the necessity of the capital market was felt not only by the developed countries like U.S.A., U.K., Germany etc. but later as a passage of time even the developing countries like India, Philippines, Bangladesh, Nepal etc begins to feel its necessity. Now they adopted it too. In connection with the necessity of capital market, S.L.N. Simha in his book "The Capital Market in India" has observed that capital is an extremely fascinating subject. An efficient capital market is an indispensable pre-requisite to economic development. In fact even as regards the resources for the public sector, the capital market has a rather important role to play (Simha, 1960: 1). The study conducted by Bary Borsworth on ' Industrial Production and Price of Common Stock', 1953-1975 has revealed that the stock market and economic activity move in similar cyclical patterns. This fundamental relationship shows that the stock price is meaningful in the sense of reflecting real economic variables. The investment decision in the stock market is a function of the prevailing market price and return to capital. By return to capital is meant the algebraic sum of increment in the value of yield (Dookha, 1962: 82). A senior economist, Ross Levine in the finance and private sector department division of World Bank's Policy Research Department, has mentioned in his article that stock market may affect the economic activity through the creation of liquidity. Many profitable investments require a long-term commitment of capital, but investors are often reluctant to relinquish control of their savings from long periods. Liquid equity markets make investment less risky and more attractive because they allow savers to acquire an asset-equity and to sell it quickly and cheaply if they need access to their savings or want to alter their

31

portfolios. At the same time, companies enjoy the permanent access to capital raised through issues. By facilitating long-term, more profitable investments, liquid markets improve the allocation of capital and enhance the prospect for the long -term economic growth. Further by making investment less risky on more profitable stock market liquidity can also lead to more investment (Levin, 1996: 133). Common stock has one important investment characteristic and one important speculative characteristic. Their investment value and average market price tend to increase irregularly but persistently over the decades as their net worth builds up through the reinvestment of undistributed earnings. However, most of the common stocks are subject to irrational and excessive price fluctuations in both decisions as the consequence of the ingrained tendency of most people to speculative or gamble, i.e. to give way to hope, fear and greed.(Chandra, 1995: 35) Hara, on the article on Financial Journal writes that information plays important role in the discovery of assets (securities). Further the writer says that, The premise developed in this talk is that liquidity and price discovery are important dimensions of asset markets and, by extension, of asset prices. That information should affect asset prices is hardly new; finance researchers have long focused on the information efficiency of asset prices. The innovation here is the argument that when information is asymmetric, uniformed investors demand compensation for portfolioinduced risks which they cannot diversify. Note that my arguments do not imply that markets are necessarily inefficient; there are no arbitrage opportunities here, nor is there the provisional free lunch. Traders with superior information will move prices toward full information levels, but continuously attaining full information levels is not credible new information arrives, old information is obsolete. Market prices can be martingales with respect to information, but if traders have diverse information sets, then these expectations need not be the same across traders. Thus, as in microstructure models, the adjustment of prices of full information values can differ widely

32

across markets that are deemed efficient. And it is this difference in adjustment that gives rise to the effects discussed here. (Hara, 2003: 1351)

2.3 Review of Journals, Books and Articles of Stock Market in Nepalese Context:

As stock market is in infancy stage in Nepalese context, there are limited books, journals and research studies concerning stock market and its pricing behaviour. So, the available articles, books, previous research works, which are related to stock market are consulted and reviewed. A book about capital market by Dr. R.S.Mahat entitled "Capital Markets Financial Flows and Industrial Finance in Nepal" was written in the early period of the development of capital market and before the establishment of stock exchange. So Dr. Mahat made the first priority to establish stock exchange for the development of stock market. He also writes that Nepalese stock market is still in infancy stage and some drawbacks to the development of stock markets are strong historical and social reasons as well as mass poverty and illiteracy in Nepalese society. He further points out that some conscious and educated people of urban areas are also not investing in the industrial sector instead they are investing on the real estate especially building construction. Although the book is written in the early stage of the development of stock market, the limitations of Nepalese society regarding the investment in stock market is still reality of Nepalese Capital market. Similarly the next book by Dr. R.S. Pradhan's is very valuable for the purpose of analyzing the capital market in Nepal. In his book he writes about the Stock Market behaviour in Nepal that A number of studies have been conducted on the stock market behaviour in developed and big capital markets but their relevance is yet to be seen in the context of smaller and underdeveloped capital markets.(Pradhan, 1994: 42-43). As per the book, the stock market behaviour in smaller and underdeveloped capital markets is thus one of the important areas of the study in

33

finance. Information on stock market behaviour in such smaller and underdeveloped capital markets would help development of realistic theoretical models and formulation of relevant hypotheses for empirical testing in finance. Thus it is felt necessary to study stock market behaviour in the context of smaller and under-developed capital markets, and this chapter prepared with reference to Nepal is a small attempt towards that end. "In Nepal, the listing of shares in Stock Exchange Center (SEC) and their trading in the stock market is a recent phenomenon. The Nepalese stock market is characterized by low trading volume, absence of professional brokers, early stage of growth, limited movement of share prices, and limited information available to investors. A number of researchers are available on government owned public enterprises but researches on enterprises whose stocks are listed in SEC and traded in stock market are yet to come up in Nepal. Viewed in this way, this chapter is expected to provide at least some insights into stock market behaviour in Nepal. This chapter can be considered important, as Nepal has already started the process of privatization of public or government owned enterprises." (ibid) Among the various empirical contradictions to the Asset Pricing Model of Sharpe(1964), Linter (1965), and Black(1972), the most prominent is the size effect of Banz(1981). He finds that average returns on large stocks are lower while average returns on small stocks are higher. The positive relation between leverage and average returns on US stocks and a firms book value of common equity to its market value is documented by Stattman (1980) and Rosenberg, Reid, and Lanstein (1985). Similarly, Chan Hamao, and Lakonishok (1991) find the strong role of book-to market equity in explaining the cross-section of average returns on Japanese stocks. Basu (1983) also finds earnings-price ratio is explaining the cross-section of average returns on US stocks. Again, Ball (1978) finds that earnings price relation is likely to be higher for stocks with higher risks and expected returns. Though there are these findings in the

34

context of developed and big capital markets, their applicability is yet to be seen in the context of smaller under-developed capital markets. This chapter therefore attempts to assess some of the cross-section behaviour of stock market similar to ones as described above in the context of Nepal. In an attempt to assess the stock market behaviour in Nepal, it specifically examines the relationship of market equity, market value to book value, price earning and dividends with liquidity, profitability, leverage, assets turnover and interest coverage. In the book, "Shareholder's Democracy and AGM feedback" Prof. Manohar Kumar Shrestha has focused various issues related to protection of shareholder's expectation. Success of companies directly depends on the protection of their owners. But how can this be accomplished is main question. Thus it is necessary to develop a possible guidance for enhancing the efficiency for public limited companies to contribute directly in the growth of national economy on one hand and ensuring handsome return to the shareholders on the other hand to maid their investment meaningful and worthwhile. At present, the overall shareholders' democracy in terms of protection their interest is basically focused on the payment of satisfactory dividend and the maximization of shareholders' wealth by appreciating the value of shares they sold. (Shrestha, 1999: 25) Investors were enlightened and they stated inquiring about companys financial health and future prospect before buying or selling shares. People turned to price-earning multiples: NEPSE indexes informed trading became sort of a norm when stock market entered 1995. Many who could not cope e\with the system of intelligent speculation left the ground. As a result, the numbers of buyers gradually came down and so did the prices.(The Kathmandu Post, May 18,1996: 6) Panta, Rekha analyzed in her study, "Current status of share market in Nepal", the trend of Nepalese stock market and present state of primary and secondary market was found satisfactory. According to her study, the development of stock market primarily depends on program and

35

their implementation. In Nepal, the overall policy environment has not been conducted to the development of stock market. Therefore, it is difficult to develop more efficient secondary market, trading system for both equity and debt securities. Capital Market is a crucial element in the national economy. Its role in reinvigorating and boosting the economic activity in the country holds significant. The strategic plan released by securities board can, to a great extent, energize the investors, dealers by increasing investor interest in it. Security market experiences both boom and boast soon after the beginning of securities trading through brokers' member in the stock exchange floor. Through the market started to function quickly boosting the price of share to an unexpected level, it could not sustained (Business age, 1999: 10). Return from investment in stock is not short run phenomenon. Investors have to learn few things before they make investment on stock. First of all they should know the financial health of that company. For example; if somebody want to invest in the share of Standard Charted Bank, he/she must see its balance sheet or at least paid-up capital, last year net profit, current year anticipated profit and calculate earning per share and price earning per share and price earnings ratio. These two numbers would give a fair idea about company health and then market price would judged through the discount factors based upon one of the sound companys data. Market price is equal to earning per share divided by discount factor. EPS can derived by dividing total net profit after tax by total number of shares and price earning ratio by dividing market price per share by EPS. Lower the P/E ratio higher the chance of profit with capital gain and others. (Business age, 2001: 20) Investment in share has traditionally been done by rating the institutions on the price of price earning ratio or dividend. Hardly do investors compare current assets with current liabilities or take a look at the debt equity ratio. Unless investors begin analyzing the intricate financial

36

details of corporate institutions before making investment decision, the market cannot develop smoothly. Share investment has traditionally been guided by the investors return. Most earning of investor here have been in the form of dividends rather than capital gains, though high dividends are often seen, incorporate finance theory as a wasteful use of scares capital. With the commercial bank becoming the only potential destination, other stocks market participants hardly making profit, and even they did failing to meet investors expectations, demand for shares of commercial banks outpaced supply and their price boomed. Now the latest slums in the secondary market, despite a pretty good performance by commercial banks, make it more apparent that investment in the past was done on whim. Even officials at the stock exchange and the securities board, refuting investors allegations of the market manipulation and insiders trading of last February, discreetly claimed that the Nepalese stock market is in a nascent stage. And that, investment are made more on an impulse, rather than through market study and credit rating.(Business age 2001:25) ADB experts have seen many obstacles to the growth of the capital market. This includes low level of investors' confidence, disclosure of poor and manipulated financial information weak enforcement of regulation absence of instructional investors, lack of diversity in the range of financial instruments and the scope of active participation for the various intermediaries limited by vertical barriers.(The Rising Nepal, 2001: 7).

There are many masters' thesis prepared by various researcher in the subsequent previous years. Among them some thesis are reviewed here for analysis of literature. On the study of Mr. Bharat Prasad Bhatta, he focused that, resource mobilization has a vital role in the developing economy like Nepal. The development of the Stock market is a must for the resource mobilization.

37

There are various problems of Nepalese Stock market, which have checked the resource mobilization in the economy. In his research work, "Dynamic of Stock Market in Nepal" Mr.Bhatta set the following objectives and followed by the some recommendation too which is given below: To analyze the trend of the Nepalese stock market. To diagnose and compare the sectoral financial status of the To analyze the market share prices of the Nepalese stock To find out the impact of the secondary or primary market

stock in Nepalese stock market market. and vice versa. According to the above objectives "Mr. Bhatta recommended the following points by his recommendation and conclusion section:

The government should make not only policies for the capital development but also implement these policies

market

appropriately. Investment in corporate sector should be encouraged and The regulatory authorities of the stock market should cerate their share should be listed in the stock exchange. an environment to rise the trading of share in the stock exchange. The government should make appropriate policies and for the enhancement of the entrepreneurship programs

development in the Nepalese economy. In his conclusion he try to show that although it has become late to take steps to overcome such problems of the Nepalese stock market in order to make it active and supportive, the stock market has a good prospect for the resource mobilization to finance the productive enterprises in the Nepalese economy.

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Likewise the main objectives of the dissertation prepared by Mr. Khagendra Prasad Ojha, entitled "Financial Performance and Common stock pricing" at 2000 were: To study and examine the difference of financial performance and stock price. To examine the relationship of dividend and stock price. To explore the signaling effect on stock price.

The findings presented on behalf of the given objectives were: Nepalese stock market is in infancy stage. In general it is Dominance of banking sector is prevalent in the market due very new and just started to develop. to other industries including finance -companies, insurance and manufacturing is not encouraging. Due to the lack of the proper investment opportunity most of the investors have directed their savings towards the secondary stock market. Corporate firm with long history have a relatively stable profitability parameters than the firm established after the economize liberalization of 1990. Older firms have been issuing bonus share more times than Dividend per share is relatively more stable than dividend the new one pay out ratio. Thats why pay out ratio and dividend yield has been highly fluctuating. There is significant positive correlation between the dividend paid and stock prices of banking and manufacturing industries. All other industries have not the perfect correlation between the dividend paid and stock prizes. The study done by Mr. Ojha denotes that Nepalese stock market is still in developing stage. Some corporate firms with long history have relatively stable profitable parameters then that of the newly established firms. Similarly dividend pay out ratio and dividend yield is more fluctuating

39

and there is positive relationship between dividend and stock price of the firms. However it may be affected due to the change in time period and other constraints at present. Mr. Mukti Pd. Aryal (1995) has conducted research on The General Behavior of stock Market Prices. The objectives of the study were; To discuss theoretically the movements of stock market prices as predicted by the random walk model; To develop the empirical probability distribution of successive price changes of an individual common stock and a stock market as a whole; To examine whether the successive price changes of stock market are independent to each other or not? He used the 21 stock (common) out of listed companies in Nepal Stock Exchange through the study consists of daily closing prices for almost 8 months period. He used the serial correlation test and run test as Test Methodology: Serial Correlation Test: He applied serial correlation to test whether the price changes of shares are independent to each other. For this purpose he computed the serial correlation of 1-5 lag days applying the natural logarithm model for daily price changes. Runs Test: In order to test the random walk model he also applied run tests. He analyzed runs by total numbers of expected runs, runs by signs and runs by length. The major findings and conclusion of the study are as follows: He found average correlation of 0.102, 0.109, 0.088, 0.045 and 0.04 of 1,2,3,4 & 5 lag days respectively. The results of estimated co-efficient of serial correlation were quite large and average estimates of co-efficient were substantially positive in most of cases except of few individual cases. And the results of runs test were also consistence with the results of serial correlation tests. Results of the findings, he concluded, the

40

stock price changes can be explained as serially positive dependent to each other as an adequate description of reality i.e., todays price changes of an individual common stock is not as unbiased and independent outcomes of yesterday price changes of Bernoulli process.(Aryal, 1995: 103) On the research paper on," Stock Market Behaviour of Listed Joint Venture Company in Nepal conducted by Mr. Bachhu Ram Dahal describes the stock market as the back bone of the country. Further he set the main objective of his study was to study, examine and analyze the stock market behavior. Specifically the objectives were: To study and analyze stock price trend and volume of stock To study and analyze the rate of listing of new companies To study and analyze the investors views regarding the To study and examine the signaling factors' impact on stock To suggest the abstract to the interested parties related to traded on the secondary market. and maintenance of listed company in Nepal Stock Exchange Ltd. decision on stock investment. price with the help of NEPSE index. stock market. In his conclusion Mr. Dahal says that Stock Market is the backbone of investment sector of the country. So by promoting the stock market in sizeable economic sector raise the economic development by mobilizing swing into productive sectors by making suitable investment for making suitable investment environment different elements like price trend NEPSE index, volume of stock traded, rate of listing. Signaling factors should be analyzed. Stock market was not properly analyzed for smooth operation of secondary market. It shows gap between theory and practice of investment. In Nepalese stock market the study of market behavior is a very useful subject matter if properly analyzes for the development of stock market.

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Nepal stock exchange limited is analyzing stock market behavior in very little area regarding the stock market. So experts should be recruited and analyzed market behavior in efficient way so that all parties interested with stock market can get benefit from this. The data analysis showed that Nepal stock exchange is not providing facilities for investors such as general awareness about investment, investment procedure for general public and movement of stock trend in different periods and their cause are not explained. Most of the investors are complaining that the market makers, brokers, and NEPSES staffs are making coalition for fraudulent activities towards investors. So NEPSE should clear this type of charge for the development of stock market. The role of market players in the market should made effective in promoting capital market on the country by giving proper training and adopting changes environment with modern tools and technique. Investment is the lifeblood of economic development. It is evident that stock exchange will continue to fulfill their vital functions in the national economy. So long as private enterprises exist, we know that the stock exchange is the place where stock and shares are bought and sold. The substantial competition in innumerable buyer and seller determines the prices with a measure of precision that cannot be obtained in other unorganized market. So, stock market is the properly market for the development of the national economy. The development of stock market in Nepal is both challenging and difficult. Though the viewpoint of share transition, public interest towards stock market, the trend of the price movement, information system etc indicates the low performance of stock market. The problem like lack of strong professional analysis, independent buyer and seller, well trained manpower and management delay in transfer of shares, rational investor exist from the Nepalese stock market. Moreover there are many other attraction that stock market able to attract the new generation toward it. Stock market will be the strong market for the

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unemployed young generation to build their career in capital market; i.e. it has lots of prospects of development. From Dahals study it seems that no comprehensive research has been conducted in relation to the development of stock market in Nepal, major problems facing by Nepalese stock market and expectation of future growth. Thus, the stock market further requires timely research to explore details of the problem and prospects of stock market in Nepal. Mr. Sadakar Timilsina (1997) has conducted research on Dividend and Stock Price The study was carried out by the data for 16 enterprises from 1900 to 1994. The main objectives of that study were as follows: on stock price. ratio. To explain the price behavior, the study used simultaneous equation model as developed by Friend and Puckett (1964). The main findings of that study were as follows: The difference between dividend per share Dividend per share affects the share prices Changing the dividend policy or dividend per The difference between stock prices and The difference between stock prices and To identify whether it is possible to increase the market value of the stock changing dividend policy or payout To test the difference between dividend per To determine the impact of dividend policy share and stock prices

and stock prices is positive in the sample companies. variedly in different sectors. share might help to increase the market price of share. retained earnings per share is not prominent. lagged earnings ratio is negative.

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in the context of Nepal, it has overcome necessary to find out whether their findings are still valid. Tililsinas study was based on 45 observations. The number of companies included in the same was only 16, which is quite low. Studies on dividends conducted in the context of Nepal are based on Secondary data only. No study has been conducted on dividends by using primary data as yet. There is a need to conduct is survey of financial executives in order to find out more qualitative facts on dividends which can not be determined through the use of secondary data. This is the first attempt that studies dividends based on questionnaire survey. Moreover, the earlier studies on dividends have become old and need to be update and validated because of the rapid changes taking place in financial market of Nepal. Mr. Surya Chandra Shrestha (1999) has conducted research on Stock Price Behavior in Nepal, this study aims to examine the efficiency of the stock market in Nepal. The objectives of the study were: To examine the serial correlation of successive daily price changes of the individuals stocks. To determine whether the sequence of price changes is consistent with changes of the series of random numbers expected under the independent Bernoulli process. market through To determine the efficiency of the stock the To theoretical provide model of efficient policy market towards

hypothesis in the Nepalese stock market. feedback institutional development of efficient market. He used the data considering the daily closing price of 30 listed companies shares (ordinary) in the NEPSE. His study period was consists of almost hour and half years. He used the as serial correlation test and run test as Test Methodology.

44

Serial Correlation Test: He applied serial correlation to test the stock price behavior of Nepal Stock Exchange by giving sight in whether the price changes of shares are independent to each other. For this purpose he computed the serial correlation of 1-15 lag days applying the natural logarithm model for daily price changes. Run Test: He also, In order to test independence of stock prices, applied runs test. He analyzed runs by total numbers of expected runs and runs signs. The major findings and conclusions drawn on this study were: After applying the required models and methodologies he found average correlation coefficient of 0.2055, 0.0825, 0.0704 for 1,2 and 3 lag days respectively. And for lags 5 to 15 days were less than 0.07. In overall, large number of serial correlation coefficients of the log price changes of the 30 stocks for the sample periods are significantly departed from zero. In addition runs analysis also followed the serial correlation results that mean there has significant difference between actual numbers of runs for series of daily closing prices changes of the market. By the results of his applied models and methodologies he concluded, the successive price changes are not independent random variable for the 30 sample stocks listed in the NEPSE. Therefore, the random walk theory is not suitable description for the stock market price behavior in Nepal. By the study of Mr. Shrestha, large number of serial correlation coefficients of the log price changes of the 30 stocks for the sample periods is significantly departed from zero. In addition runs analysis also followed the serial correlation result that means there has significant difference between actual numbers of runs for series of daily closing prices changes of the market. In the study Mr. Shrestha has applied for technical analysis only to get the result of share price behavior and he has not used any fundamental tools for analysis.

45

From the above all studies conducted by various researchers, it seems that Nepalese stock market is still in developing stage and it is facing various challenges. Further more it also shows that there are very few research works conducted about the market price behaviour on the stock market. Most of the above stated studies use technical methods and statistical methods like run test, correlation coefficient, NEPSE trend etc for the analysis purpose. Only few of the studies use fundamental analysis tools for the research work. More than that none of the studies are concerned about the financial indicators like EPS, DPS and NWPS which are the most influencing factors for the MPS. So, this study tries to analyze the relationship of these factors with the pricing behaviour of the stock of selected companies as well as it also tries to show the influence of the important events happened in the country on market price of the stock.

46

RESEARCH METHODOLOGY

Research means to search again and again. We study the social problem again and again to find out the something more about the phenomenon. The first look may not be adequate. It prone to error, we enter in to the subject matter again and again and study the problems differently and thoroughly each time. This process is called research. Research is a systematic and organized effort to investigate a specific problem that needs solution. Methodology refers the various steps that are generally adopted by a researcher in studying his research problem along with the logic behind it. Thus, Research methodology is a way to systematically solve the research problem, what we are doing at present. In this chapter, Research Methodology, we deal mainly with the method, which are used in the period of research. In this regard, this chapter explains not only talk of the research methods but also consider the logic behind the methods, which are used in the context of our research study. So, research design, sources of data and uses of statistical and financial tools are basically explained in this chapter. To draw inferences on the market performance of stock market and price formation, different measure have been used, while collecting and interpreting relevant data, facts and figures with a view to systematic data collection and data's interpretation. Simple statistical tools have been used to finish this research works, which represent the explanatory and descriptive analysis of the relevant information and data. Both descriptive and analytical types of research are employed to fulfill the objective of research work. Primary sources of data as questionnaire, interview with officials are used to find out the public awareness regarding the investment in the shares, their risks and return and pricing of shares of the selected companies listed in the stock exchange.

CHAPTER - 3

47

Research design is the organized way of research methods or techniques used through the entire study. It is an integrated system that guides the researcher in formulating, implementing, and controlling the study. "Research Design is a plan, structure and strategy of investigation conceived so as to obtain answer to research question and to control variances", (Kothari, 1991: 24).The present study is basically related with the Nepalese stock market and the share price behavior of the selected listed companies. The study will explore the collection of data, tabulation and compilation of data, computation of compiled data and financial parameters, findings, conclusion and recommendations. To analyze the past phenomena historical research design has been used. Similarly to access the opinion, behavior or characteristics of a given population and to describe the situation and events occurring at present, descriptive research design has been used. In the same way, to analyze the significant relation between MPS on EPS, DPS, NWPS various statistical tools has been used under the phenomena of quantitative research design. The research design is thus an integrated frame that guides the researcher in planning and executing the research works.

The analysis of stock market of the selected banking, financial and insurance companies and their pricing behaviour largely depends on the number of such companies listed in the Nepal Stock Exchange (NEPSE) and share issuance by these companies. More over that share price will be infected by the supply and demand and the supply and demand of such shares depends upon the information available in the market. Therefore, all the banking, financial and insurance companies listed in the Nepal Stock Exchange and information regarding these companies are taken as the total population. Due to the low volume and amount of

48

share transaction and insufficient data, other sectors like Mfg. sector, service sector and others sectors have been neglected while taking the sampling companies from the listed companies in Nepal Stock Exchange. The samples will be taken using stratified as follows:

S No Sector No of Compa ny Listed No of Sample compani es Percenta ge Sample Companies

Commerci al Bank

11

45%

2 3

35 13

3 2

9% 16%

Nepal Arab Bank Ltd Standard Chartered Bank Himalayan Bank Nepal Bangladesh Bank Everest Bank Annapurna Finance Peoples Finance Universal Finance Himalayan Insurance Everest Insurance

For the research work only 10 companies has been taken as sampling companies out of total population. Out of them 5 from commercial banks, which covers 45% of total listed commercial banks sector, 3 from finance companies, which covers 9% of total listed finance companies sector and remaining 2, which covers 16% of total listed insurance companies. Out of 11 listed commercial bank, 5 commercial banks (45%) has been taken as sample companies which covers the 50% weighted on total sample companies. Due to the high volume of share transactions and business volume as well as more contribution to the economy in the financial sectors in comparison to others more percentage i.e. 50% weighted has been given to this banking sector while taking the sampling companies. In the same way 3 finance companies and 2 insurance companies have been taken as sample companies out of total listed companies on respective sector.

49

The main source for the data collection was the central office of Nepal Stock Exchange (NEPSE), Securities Boards office, Thapatali, Kathmandu and economic survey published by Ministry of Finance. The main source of data is annual report of the SEBO/N. Besides annual report various bulletin available, journals, articles and other publications published by different financial intuitions and other useful resources are also taken into consideration. The research is mainly based on secondary data. The required data will be collected through the corporate office of the security board Nepal (SEBO/N) Primary Data: Primary data will be collected through questionnaire and direct interview of the concerned person in the office. Secondary Data: The secondary source of data will be the annual report of the Security Board Nepal, different books from library, periodicals, newspaper cuttings, company's magazines etc. Guidelines and unpublished thesis, Research work that directly related to financial performance and stock market would form secondary data for the purpose of this study. Significant information will also be collected from Internet and various websites like www.nepalstock.com , www.sebonp.com , www.nrb.org.np etc.

As the study was based on primary as well as secondary data, information are collected by annual report published by Securities Board Nepal (SEBO/N), Trading Index published by NEPSE, Economic Survey, 2002 published by Ministry of Finance and different monthly, quarterly, half-yearly and yearly bulletins published by Nepal Rastra Bank. Similarly, the annual reports of selected banking, finance and insurance companies were the major source to get various data about the related company. For collecting primary data a set of questionnaire was prepared and distributed to the investors. The questionnaire was consisted of objective

50

questions like multiple choice questions and yes / no questions. These questions are related to the Stock market, public view toward the investment in the stock, their prices and their reaction in the information available in the market about the stocks of related companies. To get reliable information, discussions were also conducted with investors, NEPSE staff and other related parties with stock market.

Data collected from questionnaires were in raw form. They were classified and tabulated in the required format and presented in bar and pie diagrams. Data collected from secondary sources were analyzed through various financial and statistical tools. Major findings were based on the analysis and interpretation of data.

Data Analysis Tools: i) Financial Tools: a) Capitalization of Earnings: EPS ratio is used to measure the profitability of a firm from the owners view point. In this model the market value of shares of a company is dependent of the earnings of the company. The rate of earning or the earning per share is capitalized by normal rate of return in order to measure the present market value of the equity share. The market value of equity share is the capitalized value of the earning per share of a company at the cost of equity (Ke). Hence,

P0 = EPS Ke

Where,

P0 = Expected market value of an equity EPS = Earning per share Ke = Cost of capital

b) Capitalization of Dividends: Dividend refers the percentage of earnings paid in cash to its stockholders. "As long as there are investment projects with returns exceeding those that are required, it will use retained earnings and the amount of senior firm has retained earnings left over after

51

financing all acceptable investment opportunities, these earnings then would be distributed to stockholders in the form of cash dividends. If not there would be no dividends." (Van Horne, 1990; 328). People make investment in stock because they will get dividend in return. Therefore, the price they are willing to pay will depend on their expectations of dividends. Under this model, future streams of cash dividends are to be evaluated and discounted by the cost of equity(Ke). Hence, the value of an equity share is the present value of all future streams of cash dividends an investor expects to receive, according to this model. (Timilsina, 2001; 20)

P0 =

t =1

Dt (1 + ke ) t

Where, P0= present market value of an equity, Ke= The required rate of return for equity Dt= Expected future dividend at each future date t.

c) Risk Free Rate (Rf): The risk free rate has been taken from Nepal Rastra Bank (NRB) for different years based on the 91 days Treasury bills issued by NRB which are as follows: Table: 3.2 : Risk Free Rate Fiscal Year Average Risk free Rate 1997/98 1998/99 1999/00 2000/01 2001/02 3.5037 2.1222 4.5812 4.9535 4.7171

d) Rate of Return on Common Stock (Rj) : Rate of return on common stock can be defined as the change in value plus any cash distribution expressed as a percent of the beginning of period investment value. An investor can obtain two kinds of income from an investment in a share of stock : income from price appreciation or losses from depreciation and income from cash dividend. The rate of return on common stock can be expressed in percentage as follows: Rate of return=

( P Pt 1 ) + Dt Pr ice Change + Cash Dividend = t Purchase price at the start of the period Pt 1

52

Where,

Pt=Ending stock price Pt-1=Starting Stock price Dt=Cash dividend for time t

e) Required Rate of Return (R): Required rate of return is calculated as the risk free rate plus the risk premium on the risk of the particular stock. Total risk contains two parts diversifiable or unsystematic risk and undiversifiable or systematic risk. Under the assumption of CAPM, investors are not compensated for total risk, rather they are compensated in the market for facing the systematic risk. According to the CAPM the required rate of return on any stock is equal to the risk free rate of return plus market risk premium times stock beta. where, R=Rf+(E(Rm)-Rf) j R=required rate of return on stock j. Rf=risk free rate of return E(Rm)=market return or average return j=beta coefficient of stock j. f) Market Return (E(Rm)): Market return is the average return of the stocks of all companies in a industry. For this research purpose, market return has been calculated by dividing the difference of this year's market index and previous years market index by previous year's market index. Thus, E(Rm)=

This Year ' s Market Index Last Year ' s Market Index Last Year ' s Market Index

a)

Mean : Mean of a set of observations is the sum of all the observations divided by the number of observations.

n b) Standard Deviation : X =

It is a quantitative measure of the total risk of assets. It provides more information about the risk of the asset. It is a measure of the total risk of the asset. It measures the dispersion of returns around the mean. Its advantage is that the uncertainty of returns can be summarized into a single easily calculated number. The standard

53

deviation of a distribution is the square root of the variance of returns around the mean.

S .D. = r j E ( r j )] 2 [ n 1

rj

Where,

is return on asset A.

c)

Coefficient of Variation : The risk per unit of expected return can be measured by the coefficient of variation, which is computed as follows:

C .V . = S .D. 100

d)

Karl Pearsons Coefficient of Correlation: It is a statitistical tool for measuring the intensity or magnitude of linear relationship between the two variables series Karl Pearsons measure, known as Personian correlation coefficient between two variables (series) X and Y, usually denoted by r(x,y) or rxy or simply r can be denoted as

r= nXY XY {nX

2

(X ) 2 } {nY 2 (Y ) 2 }

Where, n = number of observation in series X and Y; X = Sum of observations in series X; Y = Sum of observations in series Y; X2 = Sum of squared observations in series X; Y2 = Sum of squared observations in series Y; XY = Sum of the product of observations in series X and Y; The value of the correlation coefficient r lies between -1 to 1 that is -1 r 1. If r=1; there is perfect positive relationship and if r=-1 there is perfect negative relationship or if r=0 then there is no relation at all. The closer the value of r is 1 or -1, the closer the relationship between the variables and the closer r is to 0 the less close relationship. (Shrestha and Manandhar, 1999:234)

e)

54

Regression analysis means the estimation or prediction of the unknown value of one variable from the known value or variable. It is a mathematical measure of the average relationship between two or more variables in terms of the original units of the data. In regression analysis, there are two types of variables. The variable whose value is influenced or is to be predicted is called dependent variable and the variable which influences the values or is used for prediction, is called independent variable. (Gupta, 1999:298) The multiple regression equation is MPS=a+b1.EPS+b2.DPS + b3.NWPS Where, MPS=Market Price per Share (Dependent Variable) a= Regression constant b1, b2, b3= Coefficients of independent variables EPS, DPS, NWPS= Independent variables

f) Tools for Testing of Hypothesis (Paired T-test) Paired t-test has been used as statistical tool to test null hypothesis. For the test of hypothesis 10 NEPSE index before, after and during the major events has been considered. The following working formula for t-test has been calculated and interpreted as below: Where, t = pared t-test s =Standard error n = Number of Observations

d

t=

d n s

Application of Computer Software: To fulfill the study the data has procured and finalized by using correlation coefficient, valuation of stock, questioner analysis with the help of Micro Soft Excel and multiple regression analysis and t-test have been performed on SPSS (Statistical Program for Social Science). The result getting form this software has been presented in annex and the relevant information are extracted and filled up where ever needed.

55

The concept of stock market in Nepal is not very old. It is still in infancy stage though it was begun with the floatation of shares by Nepal Bank Limited and Biratnagar Jute Mill Limited (BJM) in 1937 under the company act 1936. At that time, the participation on the ownership structure of the corporate sector was restricted mostly to the Rana family; consequently, the expansion of the capital market to the desired level had been made in eighth five year plan to reform the capital market. The establishment of Securities Exchange Center (SEC) in 1976 was the first and most important attempt made by the government to develop the stock market. It was established with the objective of facilitating and promoting the growth of capital market. Before conversion in to Nepal Stock Exchange (NEPSE) it was the only capital markets institutions undertaking the job of brokering, underwriting, managing public issue, market making for government bonds and other financial services. His majesty's government, under a program initiated to reform capital markets converted securities exchange center in to Nepal Stock Exchange in 1993 (Kharel, 2002 :67). Initially, the SEC limited function for trading the government bonds and national saving certificates only. Then it acts as an issue manager for corporate securities and started to list and provides market for the corporate stocks from fiscal year 1984/85 under the Securities Exchange Act 1983. Thus, the SEC served to promote the primary as well as secondary market for government and corporate securities from fiscal year 1984/85. The incorporation of the Securities Board, Nepal (SEBO/N) under the portion of the Securities Exchange Act 1983, and conversion of the SEC into the Nepal Stock Exchange under the government policy, capital market reform had greatly contributed to the development of primary as well as secondary market for the corporate securities. The rise in stock price and the market liquidity for corporate securities were observed immediately after the incorporation of (SEBO/N) and NEPSE for

CHAPTER 4

56

one year only. This has positive and immediate impact on the primary market. But after a year, again downward trend in the primary as well as secondary market is observed and this phenomenon has been continuing till end of 2001. After a year, again downward trend in the stock market started and has been continuing till now. It was happen due to the internal and external problem face by the country's capital market. Although, the growth of stock market is high relative to the growth of the economy, the share of corporate sector in the national economy is still very low due to the negligible size of corporate sector. In Nepal, NEPSE is the only official stock market where there are three market makers, two securities dealer, twenty-seven brokers and tenissue manager to provide service of securities. Thus, the stock market in Nepal is burning issue and is in its infancy stage also. Among all the economical and financial market, the stock market is a pivotal institution in the financial system of a country. The development of the stock market depends largely on financial intimidation as well as on the availability of a wide array of financial institution. Therefore stock market development is partly a natural progression of the development of a country's financial sector as long term economic growth proceeds. Thus, the activities of buying and selling of shares on the stock are extremely important for the allocation of capital with in economies and it requires on in depth analysis.

Securities Exchange Center was established with an objective of facilitating and promoting the growth of capital markets. Before conversion in to Nepal Stock Exchange (NEPSE) it was the only capital markets institution undertaking the job of the brokering, underwriting, managing public issue, market making for government bonds and other financial services. His Majesty's Government under a program initiated to reform capital markets converted Securities Exchange Center in to Nepal Stock Exchange in 1993.

57

The basic objective of NEPSE is to impart the free marketability and liquidity to the government and corporate security by facilitating transaction in its trading floor through member, market intermediaries, such as broker, market makers etc. After the restoration of democracy in 1990, the interim government in its short period has initiated banking reformation and has established Citizen Investment Fund (CIF). The establishment of NIDC capital market limited is also another major step to improve financial system in Nepal. His majesty's Government, as an initiator to reform the capital market, converted Securities Exchange Center into Nepal Stock Exchange Limited (NEPSE). NEPSE is a non-profit organization, operating under security exchange act 1983. NEPSE commenced its operation on 13th January 1994, with ownership among His Majesty's Government, The Nepal Rastra Bank (NRB) and Nepal Industrial Development Corporation (NIDC) and its licensed members. The ownership of different members is given below: Table: 4.1 : Shareholders of NEPSE S.NO Shareholders Investment . 1 2 3 4 HMG/N NRB NIDC Other Members (%) 52.55 39.72 7.04 0.69

The authorized capital of NEPSE is Rs.50 million and the issued capital is Rs.30 million, of this 20.89 million is subscribed by HMG/N, NRB, NIDC and Other Licensed members. The main objective of NEPSE is to upgrade the infrastructure of the security exchange so that it could handle the increased activity more efficiently. This has included a focus on the modernization of the trading clearing settlement and surveillance procedures. There are 27 industrial securities brokers, 10 issue managers, 2 securities dealers and 1 market maker to smooth the daily transaction of buying and selling of securities. (SEOBN-Annual Report, 2000/01: 7) The number of listed companies was 16 in1986 where as it

58

was 115 in 2001 but it is only 96 in 2002. NEPSE deleted some companies' name from its list because of not performing rules and regulation of capital market. But at the end of the fiscal year 2002/03 the total number of listed companies in NEPSE is 108. The value of listed companies' shares has reached to RS.2344.16 million in 2001 but it is Rs.1540.63 million in 2002. The market shows continues rise till 2001 but it is little down in year 2002. In Nepal current market size of tradable security is small, with it associated problems of stock availability and liquidity in order to develop stock market, NEPSE is responsible for the regulatory functions under the supervision of Security Board Nepal (SEBO/N). The stock exchange provides an organized market place for the investors to pay and sell securities freely. The market for these securities is an almost perfectly competitive one because a large number of sellers and buyers participate. In stock exchange, there is active biding and two-way auction trading takes place. Since the buying and purchasing activities are done through bargaining, the price of securities is determined by the basic laws of supply and demand. The stock exchange provides an auction market in which members of the stock exchange participate to ensure continuity of the price and liquidity to investors.

Securities Board, Nepal was established in May 26, 1993 under the provision of Securities Exchange Act, 1983(first amendment). Since its' establishment, SEBO has been concentrating its efforts to improve the legal and statutory frameworks which are the bases for the healthy development of the capital market. As a part of its continuous effort to build a sound system, the Securities Exchange Act, 1983 was amended for the second time on Jan 30, 1997. This amendment paved the way for establishing SEBO as an apex regulatory body as it widened the horizon of SEBO by bringing market intermediaries directly under its jurisdiction and also made it mandatory for the

59

corporate bodies to report to SEBO annually as well as semi-annually regarding their performance. Although the second amendment in the act established direct relationship of SEBO with the market intermediaries and the listed companies, supremacy in its jurisdiction is yet to be established and clearly recognized. In order to improve such a situation, SEBO focusing on the major areas where improvement is necessary, has launched a four-year Strategic Plan (1998-2002) with major thrust in four major policy development areas. SEBO has also drafted a new Security and Exchange Act, which has sought to improve inconsistencies observed in the present act and establish SEBO as an apex regulator of the securities market. General objectives of SEBO: i) To promote and protect the interest of the investors by regulating the issuance, sale and distribution of securities and purchase, sale or exchange of securities. ii) To supervise, look after and monitor the activities of the stock exchange and of corporate bodies carrying on securities business. iii) To render contribution to the development of capital market by making securities transactions fair, healthy, efficient and responsible The main functions of SEBO are as follows: i) ii) iii) To advise HMG on the issues related to development of To approve stock exchanges for the operation and oversee To register and regulate market intermediaries involved in capital market and the protection of the investors' interest. them for healthy trading of securities. the primary issues as well as in the secondary trading of securities. iv) To regulate public issues of securities including the mutual and trust funds. v) To monitor and supervise the securities transactions.

60

vi) To conduct researches and studies along the area of capital market. vii) To conduct conferences, workshops, seminars, and participate in such programs conducted at regional or international level and join the forum and exchange with outside regulators. Governing Board, Staffing, and Funding of SEBO: SEBO is governed by a Board, composed of seven members including a chairman. The Chairman is appointed by His Majestys Government of Nepal (HMG/N) for the tenure of four years. It is the Government's prerogative to re-appoint the chairman, if necessary. Members of the Board include representatives one each from Ministry of Finance, Ministry of Law, Ministry of Industry, Nepal Rastra Bank (The Central Bank), Federation of Nepalese Chamber of Commerce and Industry and Nepal Chartered Accountants' Association. At the end of the fiscal year 2001/2002 SEBO was manned altogether by 25 staffs including executives, officers and supervisory and support staffs. As a developing regulator of the capital market, SEBO is basically relying on governments' financial assistance. In order to be a self-dependent institution, it has created revolving fund from which it generates income that helps to cover part of its expenses. Income from registration of corporate securities and registration as well as renewal of market intermediaries are its' other financial sources. (SEOBN-Annual Report, 2000/01: 2)

This chapter deals with data presentation, analysis and interpretation following the research methodology presented in the third chapter. In this course of analysis, data gathered from various sources have been inserted in the tabular form. By using financial and statistical tools, the data have been analyzed. The results of the copulation have also been

CHAPTER 5

61

summarized in appropriate tables. The samples of computation of each model have been included in annexes. Basically the following analyses have been carried out: Co-relation coefficient analysis Multiple regression analysis Calculation of required rate of return Analysis of the primary data Paired T-test analysis

5.1

Relationship

of

MPS

with

Various

Financial

Indicators:

The relationship of MPS with various financial indicators like EPS, DPS, NWPS and currently distributed dividend of previous year is evaluated through two methods. The first one is calculation of correlationcoefficient between EPS and observed MPS, DPS and observed MPS, NWPS and observed MPS and currently distributed dividend and MPS. Similarly the second is to derive multiple regression equation of EPS, DPS and NWPS on MPS. 5.1.1 Co-relation Coefficient Analysis: Co-relation coefficient is the best measures to evaluate and examine the relationship between two variables. It showed the positive relation, negative relation and no relation between two variables. For this research purpose the five year (from 1997/98 to 2001/02) related data are first gathered and tabulated and then correlation coefficient of MPS with other financial indicators like EPS, DPS and NWPS is calculated for the selected banking and financial companies. Similarly, as the previous years dividend is distributed in the subsequent following year, the relationship of MPS with previous years dividend (this years distributed dividend) is also calculated. The following table summarizes the correlation coefficient of MPS with EPS, DPS, NWPS and with the previous years dividend or currently distributed dividend of the selected listed banking, financial and insurance companies.

62

Table: 5.1

Calculation of coefficient of co-relation between MPS and EPS, MPS and DPS, MPS and NWPS and MPS and last years DPS S. Sector Name of With EPS With DPS With With No the NWPS Last Company Years DPS 1 NABIL 0.63 0.06 0.64 -0.48 2 Standard 0.04 -0.21 -0.55 -0.29 Chartered 3 Himalayan 0.76 0.33 0.65 0.60 Bank Banking 4 Nepal 0.85 0.97 0.986 0.23 Bangladesh Bank 5 Everest 0.78 0.71 0.34 0.60 Bank 7 Annapurna -0.26 0.25 0.06 0.61 Finance 8 Peoples 0.61 No DPS 0.57 -0.46 Finance Finance 9 Universal 0.34 0.62 0.75 0.36 Finance 11 Himalayan 0.95 0.85 0.74 0.90 Insurance Insurance 12 Everest 0.85 0.90 0.83 0.85 Insurance

The above table shows the correlation coefficient between MPS and various financial indicators as EPS, DPS, NWPS and currently distributed DPS of previous year. Nepal Arab Bank Ltd (NABIL) As per the above table, the correlation coefficients of MPS with EPS, DPS, NWPS and previous years dividend of NABIL bank are 0.63, 0.06, 0.64 and -0.48 respectively. This means that market price of the stock of NABIL bank during the study period was positively influenced by EPS, DPS and NWPS. Similarly, the relationship is negative in case of previous years dividend. Since the correlation coefficient of MPS with DPS is only 0.06, DPS has no significant relation in the movement of stock price of NABIL bank. Although DPS should have a strong influence in the market price, the result is different. The reasons behind such irrelevant result could be sampling error or the collection of only five years data for the study. Similarly, the result shows that distribution of dividend (previous years dividend in current year) of NABIL bank has negative impact its

63

stock price. The calculation shows that NABIL banks stock price is more influenced by NWPS then other financial indicators. Standard Charted Bank Ltd. (SCB): In case of Standard Charted Bank, the correlation coefficients of MPS on EPS, DPS, NWPS and last years dividend are 0.04, -0.21, -0.55 and -0.29 respectively. This result indicates that the relation of MPS with EPS is nearly zero or there is no relation between them. Similarly in case of other financial indicators like DPS, NWPS and last years dividend, the relationship with MPS is negative. Although, theoretically EPS, dividend declaration and NWPS should have positive impact in MPS, the result shows the negative relation because of the short study period of 5 years. If more years data were collected and then correlation was calculated, then the result may prove the theory. Himalayan Bank Limited (HBL): The market price of the stock of HBL has positive relation with its all financial indicators like EPS, DPS, NWPS and last years dividend. As per the calculation, the correlation coefficient of MPS of HBL with its EPS, DPS, NWPS and last years dividend is 0.76, 0.33, 0.65 and 0.60 respectively. The result shows that the MPS of HBL is more affected by EPS then other financial indicators. Similarly, DPS of HBL, among other financial indicators, has least relationship with MPS. Nepal Bangladesh Bank Ltd. (NBL): If the EPS of a company is high then the demand for such companys stock is increased and thus the stock price would move forward in the same line with EPS. Similarly, DPS and NWPS also should have same kind of relation with MPS. This theoretical concept has been proved by the calculation of correlation coefficient of MPS of NB bank with its EPS, DPS and NWPS. 0.85, 0.97 and 0.986 is the value of correlation coefficient of MPS of NB bank with its EPS, DPS and NWPS. It shows that the stock price of NB bank has strong positive correlation with its EPS, DPS and NWPS. While considering with the last years dividend, its correlation

64

coefficient with MPS is 0.23 which shows that last years dividend has least impact in the stock price of NBL during the study period.

Everest Bank Ltd.: As HBL and NB bank, the correlation of MPS of Everest Bank with its EPS, DPS, NWPS and last years dividend is positive. The calculated result shows that the correlation coefficient of MPS of Everest Bank with its EPS, DPS, NWPS and last years dividend is 0.78, 0.71, 0.34 and 0.60 respectively. Among the four financial indicators, EPS and DPS has strong positive relation with MPS of Everest Bank Although NWPS also should have strong relationship with MPS as EPS and DPS, NWPS of Everest Bank has least influence in the movement of stock price then other financial indicators. Similarly, last years dividend has also significant positive relation with MPS of Everest Bank Ltd. Annapurna Finance Limited (AFL): Due to the lack of data of 2001/02 of Annapurna Finance Co. only four years data was studied and analyzed. The result states that the correlation coefficient of MPS with EPS, DPS, NWPS and last years dividend are -0.26, 0.25, 0.06 and 0.61 respectively. So, during the four years study period, DPS, NWPS and last years dividend show positive relation with MPS of the company whereas EPS shows negative relationship. Although EPS, DPS and NWPS should have strong relationship with MPS, the result shows that the change in EPS, DPS and NWPS has no significant role or least role in the change of MPS of Annapurna Finance Company. This irrelevant result occurred due to the short study period. Peoples Finance Limited (PFL): Since People Finance has not declared any dividend during the five years of the study period, it is not possible to compute co-relation coefficient of DPS with MPS. But the correlation coefficient of MPS with EPS and NWPS

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both are positive with last years dividend is negative. Numerically, the correlation coefficient of MPS of Peoples Finance with its EPS, NWPS and last years dividend is 0.61, 0.57 and -0.46 respectively. The correlation of last years dividend with MPS is negative because only in the first year of the study period, the stock holder of Peoples Finance get dividend and for the remaining years the dividend was zero. Universal Finance Limited (UFL): The market price of the stock of Universal Finance has positive relation with its all financial indicators like EPS, DPS, NWPS and last years dividend. As per the calculation, the correlation coefficient of MPS of Universal Finance with its EPS, DPS, NWPS and last years dividend are 0.34, 0.62, 0.75 and 0.36 respectively. The result shows that the MPS of Universal Finance is more affected by NWPS then other financial indicators and EPS has least relationship with MPS. Himalayan Insurance: The stock price of Himalayan Insurance Company moves in the same direction as the EPS, DPS, NWPS and last years dividend moves because the correlation coefficient between them is 0.95, 0.85, 0.74 and 0.90 respectively. This indicates that all the financial indicators have strong positive relationship with MPS of Himalayan Insurance Company. Moreover the EPS of the company has the most significant relationship with MPS. This is because when the EPS of the company has increased, the MPS has also increased and when EPS decreased the MPS has also decreased. Everest Insurance: As Himalayan Insurance Company, the correlation of MPS of Everest Insurance with its EPS, DPS, NWPS and last years dividend is positive. The calculated result shows that the correlation coefficient of MPS of Everest Insurance with its EPS, DPS, NWPS and last years dividend are 0.85, 0.90, 0.83 and 0.85 respectively. Although only four years data were taken for the calculation of correlation coefficient of Everest Insurance, all the four financial indicators, EPS, DPS, NWPS and last

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years dividend have strong positive relation with MPS of Everest Insurance Company. Such result occurs because all the four financial indicators as well as MPS of Everest Insurance Company are in increasing trend during the four years study period. 5.1.2 Multiple Regression Equation: In multiple regression analysis two or more independent variables are used to estimate the values of a dependent variable. In other words, multiple regression analysis helps to establish the functional relationship between more than two variables and thereby provides a mechanism for estimation. However, multiple regression analysis is applied here in order to analyze the combined effect of EPS, DPS, and NWPS on MPS of the sampled companies.

Multiple Regression Equation for NABIL Bank: MPS=a+b1.EPS+b2.DPS + b3.NWPS Table: 5.2 Regression Coefficient for NABIL Bank.

Descripti on Coefficient Values Standard Error Significant -t a1 3074.783 23933.36 2 0.919 b1 51.200 213.61 9 0.850 b2 -19.992 61.417 0.800 b3 -18.616 147.515 0.920 r2 0.47 1 S.E.E 683.519 9 Significa nt f 0.836

The above table summarized results of multiple regression analysis produced by using SPSS software for determining the combined effect of EPS, DPS and NWPS on MPS of NABIL bank for the five years study period. The regression constant a1 of NABIL is 3074.783 which imply that MPS does not go below that level even if EPS, DPS, and NWPS are omitted from the model. The regression coefficient b1 represents that one rupee increase in EPS leads to an average increase in MPS by 51.20 if the other two variables; DPS and NWPS are kept constant. However the value of b1 may vary by rupees 213.619 as it explain by the standard error of b1. Similarly, the regression coefficient b2 measures the average

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effect of DPS on MPS. The value of b2 being -19.992 indicates that one rupee increase in DPS leads to a decrease in MPS by Rs.19.992, holding the two other variables constant. Like wise the coefficient b3 measures the average effect of NWPS on MPS. The value of b3 which is equal to -18.616 indicates that an average increase in NWPS by one rupee leads to decrease in MPS by 18.616. The coefficient of determination r 2 explains that 47.10% variation in MPS is accounted for by the variation in EPS, DPS and NWPS and 52.90% variation in MPS is due to the other irrelevant factors. The estimation of MPS might be inaccurate by Rs.683.519 as the standard error of estimate. Similarly, the regression model is statistically insignificant at 5% level of significance as the value of significant f is 0.836 which is greater than 0.05. Multiple Regression Equation for Standard Chartered Bank: MPS=a+b1.EPS+b2.DPS + b3.NWPS Table: 5.3 Regression Coefficient for Standard Chartered Bank.

Descripti on Coefficient Values Standard Error Significant t a1 -614.280 1479.431 0.749 b1 27.964 14.273 0.300 b2 49.04 0 22.15 6 0.270 b3 -18.094 5.135 0.176 r2 0.93 2 S.E.E 285.030 1 Significa nt f 0.328

As per the above table of Multiple Regression Analysis, produced by SPSS software, a1, the regression constant SCB, is -614.280 which implies that MPS does not go below that level even if the values of EPS, DPS, and NWPS are zero. However negative MPS is ridiculous in practice. The regression coefficient b1 represents that one rupee increase in EPS leads to an average increase in MPS by 27.964 if the other two variables; DPS and NWPS are kept constant. However the value of b1 may vary by rupees14.273 as it explained by the standard error of b1. Similarly, the regression coefficient b2 measures the average effect of DPS on MPS. The value of b2 being -19.992 indicates that one rupee increase in DPS leads to a decrease in MPS by Rs.19.992, holding the two other variables constant. Like wise the coefficient b3 measures the average effect of NWPS on MPS. The value of b3 which is equal to 49.040 indicates that an

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average increase in NWPS by one rupee leads to increase in MPS by 49.040. The coefficient of determination r2 explains that 93.20% variation in MPS is caused by the variation in EPS, DPS and NWPS respectively, whereas 6.80% variation in MPS is due to the other extraneous factors. The standard error of estimate of that model reveals the fact that the estimation of MPS might vary by Rs.285.0301. Similarly, the multiple relationship as explained by this model is statistically insignificant at 5% level because significant value of F is 0.328 which is greater than 0.05. Multiple Regression Equation for Himalayan Bank ltd: MPS=a+b1.EPS+b2.DPS + b3.NWPS Table: 5.4 Regression Coefficient for Himalayan Bank.

Description Coefficient Values Standard Error Significant t a1 -231.67 1878.39 4 0.434 b1 12.018 16.071 0.591 b2 7.032 6.098 0.455 b3 11.021 11.004 0.499 r2 0.84 2 S.E.E 312.241 6 Significa nt f 0.492

As shown in the above table, the regression constant a1 of HBL is -231.67 which implies that MPS does not go below that level even if the values of EPS, DPS, and NWPS are zero. However negative MPS is ridiculous in practice. The regression coefficient b1 represents that one rupee increase in EPS leads to an average increase in MPS by 12.018 if the other two variables; DPS and NWPS are kept constant. However the value of b1 may vary by rupees16.071 as it explained by the standard error of b1. Similarly, the regression coefficient b2 measures the average effect of DPS on MPS. The value of b2 Rs.7.032 indicates that one rupee increase in DPS leads to an increase in MPS by Rs.7.032, holding the two other variables; EPS and NWPS are left constant. Like wise the coefficient b3 measures the average effect of NWPS on MPS. The value of b 3 which is equal to 11.031 indicates that an average increase in NWPS by one rupee leads to increase in MPS by 11.031. The coefficient of determination r2 explains that 84.20% variation in MPS is caused by the variation in EPS, DPS and NWPS respectively, whereas 15.80% variation

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in MPS is due to the other extraneous factors. The standard error of estimate of that model reveals that the estimation of MPS might vary by Rs.312.2416 and as the significant F value is 0.49 which is more than 0.05, the relationship established by this model is insignificant at 5% level. Multiple Regression Equation for Nepal Bangladesh Bank Ltd: MPS=a+b1.EPS+b2.DPS + b3.NWPS Table: 5.5 Regression Coefficient for Nepal Bangladesh Bank.

Descripti on Coefficient Values Standard Error Significant t a1 -500.519 1141.380 0.737 b1 -2.509 5.154 0.712 b2 2.957 12.40 6 0.851 b3 6.120 6.508 0.520 r2 0.97 7 S.E.E 152.123 1 Significa nt f 0.193

The above table shows the summarized results of multiple regression analysis produced by using SPSS software for determining the combined effect of EPS, DPS and NWPS on MPS of NB Bank Ltd. for the five years study period. The regression constant a1 of NB Bank is -500.519 which implies that MPS does not go below that level even if EPS, DPS, and NWPS are equal to zero. However negative MPS is ridiculous in practice. The regression coefficient b1 represents that one rupee increase in EPS leads to an average decrease in MPS by -2.509 if the other two variables; DPS and NWPS are kept constant. However the value of b1 may vary by rupees 5.154 as it explain by the standard error of b1. Similarly, the regression coefficient b2 measures the average effect of DPS on MPS. The value of b2, 2.957 indicates that one rupee increase in DPS leads to an increase in MPS by Rs.2.957, by leaving the two other variables as constant. Like wise the coefficient b3 measures the average effect of NWPS on MPS. The value of b3 which is equal to 6.120 indicates that an average increase in NWPS by one rupee leads to increase in MPS by 6.120. The coefficient of determination r2 explains that 97.70% variation in MPS is accounted for by the variation in EPS, DPS and NWPS and 2.30% variation in MPS is due to the other irrelevant factors. The estimation of MPS might be inaccurate by Rs.152.1321 as the standard

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error of estimate. Similarly, the multiple relationship as explained by this model is statistically insignificant at 5% level because significant value of F is 0.19 which is greater than 0.05. Multiple Regression Equation for Everest Bank Ltd: MPS=a+b1.EPS+b2.DPS + b3.NWPS Table: 5.6 Regression Coefficient for Everest Bank.

Descripti on Coefficient Values Standard Error Significant t a1 -376.684 341.375 0.469 b1 54.336 22.116 0.246 b2 5.263 4.029 0.416 b3 -4.415 3.105 0.390 r2 0.94 0 S.E.E 153.589 3 Significa nt f 0.309

The above table shows the outcomes of multiple regression analysis produced by using SPSS software for determining the combined effect of EPS, DPS and NWPS on MPS of Everest Bank Ltd. for the five years study period. The regression constant a1 of EBL is -376.684 which implies that MPS does not go below that level even if the values of EPS, DPS, and NWPS are zero. However negative MPS is ridiculous in practice. The regression coefficient b1 represents that one rupee increase in EPS leads to an average increase in MPS by 54.336 if the other two variables; DPS and NWPS are kept constant. However the value of b1 may vary by rupees 22.116 as it explained by the standard error of b1. Similarly, the regression coefficient b2 represents that one rupee increase in DPS leads to an average increase in MPS by 5.263 if the other two variables; EPS and NWPS are kept constant. Like wise the coefficient b 3 measures the average effect of NWPS on MPS. The value of b3; -4.415 indicates that an average increase in NWPS by one rupee leads to decrease in MPS by 4.415. The coefficient of determination r2 explains that 94.00% variation in MPS is caused by the variation in EPS, DPS and NWPS respectively, whereas 6.00% variation in MPS is due to the other extraneous factors. The standard error of estimate of that model reveals that fact that the estimation of MPS might vary by Rs.153.5893. As the significant F value is 0.309 which is more than 0.05, the relationship established by this model for Everest Banks MPS is insignificant at 5% level.

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Multiple Regression Equation for Annapurna Finance Ltd: MPS=a+b1.EPS+b2.DPS + b3.NWPS Table: 5.7 Regression Coefficient for Annapurna Finance.

Descripti on Coefficient Values Standard Error Significant t a1 232.917 2121.719 0.930 b1 -0.204 25.96 0.995 b2 1.381 9.585 0.909 b3 0.184 12.948 0.991 r2 0.12 S.E.E 386.457 4 Significa nt f 0.982

The above table shows the summarized results of multiple regression analysis for determining the combined effect of EPS, DPS and NWPS on MPS of Annapurna Finance Company Ltd. for the five years study period. The regression constant a1 of Annapurna Finance is 232.917 which implies that MPS does not go below that level even if EPS, DPS, and NWPS are equal to zero. The regression coefficient -0.204 for b1 represents that one rupee increase in EPS leads to an average decrease in MPS by Rs. 0.204 if the other two variables; DPS and NWPS are kept constant. Generally EPS should have positive influence in MPS but the result here derived shows the negative because of the short study period. However the value of MPS caused by EPS may vary by rupees Rs. 25.96 as it explains by the standard error of b1. Similarly, the regression coefficient b2 measures the average effect of DPS on MPS. The value of b2, 1.381 indicates that one rupee increase in DPS leads to an increase in MPS by Rs. 1.381, by leaving the two other variables as constant. Like wise the coefficient b3 measures the average effect of NWPS on MPS. The value of b3 which is equal to 0.184 indicates that an average increase in NWPS by one rupee leads to increase in MPS by Rs. 0.184. However the value of MPS may vary by Rs. 9.585 and Rs. 12.948 by the effect of DPS and NWPS separately as the standard error of b2 and b3 shows it. The coefficient of determination r2 explains that 12.00% variation in MPS is accounted for by the variation in EPS, DPS and NWPS

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and 88% variation in MPS is due to the other irrelevant factors. Similarly, the multiple relationship as explained by this model is statistically insignificant at 5% level because significant value of F is 0.98 which is greater than 0.05.

Multiple Regression Equation for Peoples Finance Ltd: MPS=a+b1.EPS+b2.DPS + b3.NWPS Table: 5.8 Regression Coefficient for Peoples Finance.

Descripti on Coefficient Values Standard Error Significant t a1 120.182 96.714 0.340 b1 0.643 0.897 0.548 b2 b3 0.575 0.977 0.616 r2 0.46 2 S.E.E 87.4083 Significa nt f 0.538

The above table shows the outcomes of multiple regression analysis produced by using SPSS software for determining the combined effect of EPS, DPS and NWPS on MPS of Peoples Finance Company Ltd. for the five years study period. The regression constant a1 of PFCL is 120.182 which implies that MPS does not go below that level even if the values of EPS, DPS, and NWPS are zero. The regression coefficient b1 represents that one rupee increase in EPS leads to an average increase in MPS by 0.643 if the other two variables; DPS and NWPS are kept constant. However the value of b1 may vary by rupees0.897 as due to the standard error of b1. Similarly, the regression coefficient b2 measures the average effect of DPS on MPS. Due to the non declaration of cash dividend during our study period by the co. the effect of DPS on MPS could not explained and left blank as above. Like wise the coefficient b3 measures the average effect of NWPS on MPS. The value of b3 which is equal to 0.575 indicates that an average increase in NWPS by one rupee leads to increase in MPS by 0.575. Whereas it may vary by Rs. 0.977 due to the standard error explained in b3. The coefficient of determination r2 explains that 46.20%

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variation in MPS is caused by the variation in EPS, DPS and NWPS respectively, whereas 53.80% variation in MPS is due to the other extraneous factors. The standard error of estimate of that model reveals that fact that the estimation of MPS might vary by Rs.87.4083. The relationship explained by this model for Peoples Finance is insignificant at level of 5% because the significant F value is 0.538 which is more than 0.05. Multiple Regression Equation for Universal Finance Ltd: MPS=a+b1.EPS+b2.DPS + b3.NWPS Table: 5.9 Regression Coefficient for Universal Finance.

Description Coefficient Values Standard Error Significant -t a1 139.828 44.387 0.196 b1 -19.197 3.123 0.103 b2 7.804 1.476 0.119 b3 3.236 0.552 0.108 r2 0.98 9 S.E.E 15.0772 Significa nt f 0.134

As above table explains the multiple regression analysis to determine the combine effect of EPS, DPS and NWPS on MPS computed by SPSS software of Universal Finance Co. Ltd. during the five years study period. The regression constant MPS (a1) of UFCL is 139.828 which implies that MPS does not go below that level even if the values of EPS, DPS, and NWPS are zero. The regression coefficient b1 represents that one rupee increase in EPS leads to an average decrease in MPS by 19.197 if the other two variables; DPS and NWPS are kept constant. However the value of b1 may vary by rupees 3.123 as it explained by the standard error of b1. Similarly, the regression coefficient b2 measures the average effect of DPS on MPS. The value of b2, Rs.7.804 indicates that one rupee increase in DPS leads to an increase in MPS by Rs.7.804, holding the two other variables; EPS and NWPS are left constant. However the value of DPS may vary by Rs.1.476 due to the standard error. Like wise, the coefficient b3 measures the average effect of NWPS on MPS. The value of b3, 3.236 indicates that an average increase in NWPS by one rupee leads to increase in MPS by 3.236. The coefficient of determination r2 explains that 98.90% variation in MPS is caused by the variation in EPS, DPS and NWPS respectively, whereas 1.10% variation in MPS is due to the other

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extraneous factors. The standard error of estimate of that model reveals that the estimation of MPS might vary by Rs.15.0772. As the significant F for the Universal Finance is 0.134, the relationship established by this model is significant only on the level of 13.4% and it is insignificant at the level of 5%. Multiple Regression Equation for Himalayan General Insurance: MPS=a+b1.EPS+b2.DPS + b3.NWPS Table: 5.10 Regression Coefficient for Himalayan General Insurance.

Description Coefficient Values Standard Error Significant t a1 7.735 389.798 0.987 b1 8.129 4.854 0.343 b2 -3.213 5.480 0.662 b3 0.399 3.759 0.933 r2 0.93 1 S.E.E 46.6175 Significa nt f 0.330

The above table depicts the summarized results of multiple regression analysis produced by using SPSS software for determining the combined effect of EPS, DPS and NWPS on MPS of Himalayan General Insurance Co. Ltd. for the five years study period. The regression constant a1 of HGICL is 7.735 which imply that MPS does not go below that level even if the value of EPS, DPS, and NWPS are zero. The regression coefficient b1 represents that one rupee increase in EPS leads to an average increase in MPS by 8.129 if the other two variables; DPS and NWPS are kept constant. However the value of b1 may vary by rupees 4.854 as it explain by the standard error of b1. Similarly, the regression coefficient b2 measures the average effect of DPS on MPS. The value of b2 being -3.213 indicates that one rupee increase in DPS leads to a decrease in MPS by Rs.3.213, holding the two other variables constant. However it may vary by Rs.5.480 due to the standard error of b2. Like wise the coefficient b3 measures the average effect of NWPS on MPS. The value of b3 which is equal to 0.399 indicates that an average increase in NWPS by one rupee leads to decrease in MPS by 0.399.The coefficient of determination r2 explains that 93.10% variation in MPS is caused by the variation in EPS, DPS and NWPS and 6.90% variation in MPS is due to the other irrelevant factors. The estimation of MPS might be inaccurate by

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Rs.46.6175 as the standard error of estimate. As the significant F value is 0.33 for Himalayan General Insurance which is more than 0.05, the relationship established by this model is insignificant at 5% level. Multiple Regression Equation for Everest Insurance: MPS=a+b1.EPS+b2.DPS + b3.NWPS Table: 5.11 Regression Coefficient for Everest Insurance.

Descripti on Coefficient Values Standard Error Significant t a1 554.115 133.452 0.16 b1 16.256 0.942 0.13 b2 8.240 0.119 0.19 b3 7.161 0.431 0.18 r2 0.92 8 S.E.E 0.9327 Significa nt f 0.40

The above table shows the combined effect of EPS, DPS and NWPS on MPS of Everest Insurance Company for the five years study period. The regression constant a1 of Everest Insurance is 554.115 which implies that MPS does not go below that level even if the values of EPS, DPS, and NWPS are zero. The regression coefficient b1 represents that one rupee increase in EPS leads to an average increase in MPS by Rs. 16.256 if the other two variables; DPS and NWPS are kept constant. However the value of b1 may vary by rupees 0.942 as it explained by the standard error of b1. Similarly, the regression coefficient b2 represents that one rupee increase in DPS leads to an average increase in MPS by Rs. 8.240 if the other two variables; EPS and NWPS are kept constant. Like wise the coefficient b3 measures the average effect of NWPS on MPS. The value of b3; 7.161 indicates that an average increase in NWPS by one rupee leads to increase in MPS by Rs. 7.161. The coefficient of determination r2 explains that 92.8% variation in MPS is caused by the variation in EPS, DPS and NWPS respectively, whereas 7.2% variation in MPS is due to the other extraneous factors. As the significant F value is 0.40 which is more than 0.05, the relationship established by this model for Everest Insurance Cos MPS is insignificant at 5% level. Multiple Regression Equation for Banking Sector: MPS=a+b1.EPS+b2.DPS + b3.NWPS

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Descripti on Coefficient Values Standard Error Significant t a1 652.035 298.492 0.040 b1 14.357 4.895 0.008 b2 4.519 3.825 0.251 b3 -3.746 2.275 0.114 r2 0.61 9 S.E.E 355 Significa nt f 0

The above table shows the outcomes of multiple regression analysis for the banking sector. The regression coefficient b1 is 14.357 which imply that one rupee change in EPS leads to the average of about Rs. 14.357 increase in MPS of the whole banking sector if other two variables are kept constant. However the standard error for b1 shows that the MPS might vary by Rs. 4.895. Similarly the regression coefficient b2 and b3 is 4.519 and -3.746 respectively. This indicates that the MPS of banking sector will increase by Rs. 4.519 in average if DPS is increased by Rs. 1 and the MPS will decrease by Rs. 3.746 if NWPS is increased by Rs. 1 and other two variables are kept constant for each case. Although increase in NWPS should not decrease the value of MPS, the irrelevant result occurred due to the short study period. The value of standard error of b 2 and b3 is 3.825 and 2.275 respectively, which indicate that the value of MPS by the impact of DPS and NWPS could vary by Rs. 3.825 and Rs. 2.275 respectively. The regression constant a with the value of 652.035 indicates that MPS of banking sector does not go below Rs. 652.035 in average even if EPS, DPS and NWPS have value of zero. But the standard error of estimate of the model reveals that the estimation of MPS may vary by Rs. 355. The coefficient of determination (r2) explains that 61.9% variation in MPS is due to the variation in EPS, DPS and NWPS whereas 38.1% variation in MPS is caused by other external factors. the significant F value is 0 which is less than 0.05. The regression model is statistically significant at 5% level of significance as

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Description Coefficient Values Standard Error Significant t A 75.633 76.492 0.346 b1 0.364 1.252 0.777 b2 0.425 1.554 0.790 b3 0.879 0.765 0.277 r2 0.40 1 S.E.E 131.547 Significa nt f 0.147

The above table explains the multiple regression analysis to determine the combine effect of EPS, DPS and NWPS on MPS computed by SPSS software of the selected companies of finance sectors so that they could represent whole finance sector. During the five years study period. The regression constant of MPS (a) of finance sector is 75.633 which imply that MPS does not go below Rs. 75.633 even if the values of EPS, DPS, and NWPS are zero. The regression coefficient b1 represents that one rupee increase in EPS leads to an average increase in MPS by Rs. 0.364 if the other two variables; DPS and NWPS are kept constant. However the value of b1 may vary by rupees 1.252 as it explained by the standard error of b1. Similarly, the regression coefficient b2 measures the average effect of DPS on MPS. The value of b2, 0.425 indicates that one rupee increase in DPS leads to an increase in MPS by Rs.0.425, holding the two other variables; EPS and NWPS are left constant. However the value of DPS may vary by Rs. 1.554 due to the standard error. Like wise, the coefficient b3 measures the average effect of NWPS on MPS. The value of b3, 0.879 indicates that an average increase in NWPS by one rupee leads to increase in MPS of finance sector by Rs. 0.879. The coefficient of determination r2 explains that 40.1% variation in MPS of finance sector is caused by the variation in EPS, DPS and NWPS respectively, whereas 59.9% variation in MPS is due to the other extraneous factors. Since the impact of EPS, DPS and NWPS in MPS should be maximum then other external factors, this derived result seems irrelevant. This occurs because of the short study period. Similarly, the significant F for the financial sector is 0.147 which indicates that the relationship established by this model is significant only on the level of 14.7% and it is insignificant at the level of 5%.

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Multiple Regression Equation for Insurance Sector: MPS=a+b1.EPS+b2.DPS + b3.NWPS Table: 5.14 Regression Coefficient for Insurance Sector.

Descripti on Coefficient Values Standard Error Significant t a1 -30.951 305.613 0.923 b1 4.397 7.453 0.581 b2 5.591 9.448 0.580 b3 0.52 3.027 0.87 r2 0.80 6 S.E.E 72.275 Significa nt f 0.031

As shown in the above table, the regression constant a 1 of insurance sector is -30.95 which implies that MPS does not go below Rs. -30.95 for the insurance sector in average even if the values of EPS, DPS, and NWPS are zero. However negative MPS is ridiculous in practice and such impractical result occurs due to the sampling error. The regression coefficient b1 represents that one rupee increase in EPS leads to an average increase in MPS of the finance sector in average by Rs. 4.397 if the other two variables; DPS and NWPS are kept constant. However the value of b1 may vary by rupees 7.453 as it explained by the standard error of b1. Similarly, the regression coefficient b2 measures the average effect of DPS on MPS. The value of b2, 5.591 indicates that one rupee increase in DPS leads to an increase in MPS of finance company by Rs. 5.591, holding the two other variables; EPS and NWPS are left constant. Like wise the coefficient b3 measures the average effect of NWPS on MPS. The value of b3 which is equal to 0.52 indicates that an average increase in NWPS by one rupee leads to increase in MPS by Rs. 0.52. The coefficient of determination r2 explains that 80.60% variation in MPS of the financial sector is caused by the variation in EPS, DPS and NWPS respectively, whereas 19.40% variation in MPS is due to the other extraneous factors. The standard error of estimate of that model reveals that the estimation of MPS might vary by Rs.305.613 and as the significant F value is 0.031 which is less than 0.05, the relationship established by this model is significant at 5% level.

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Multiple

Regression

Equation

for

Banking,

Finance

and

Insurance Sector: MPS=a+b1.EPS+b2.DPS + b3.NWPS Table: 5.15, Regression Coefficient for Banking, Finance and Insurance Sector.

Descripti on Coefficient Values Standard Error Significant t a1 101.527 162.839 0.536 b1 5.558 2.755 0.050 b2 5.565 2.609 0.039 b3 0.417 1.472 0.778 r2 0.60 3 S.E.E 364.6 Significa nt f 0

The above table shows the outcomes of multiple regression analysis for the whole banking, insurance and finance sector. The regression coefficient b1 is 5.558 which imply that one rupee change in EPS leads to the average of about Rs. 5.558 increase in MPS of the whole banking and insurance sector if other two variables are kept constant. However the standard error for b1 shows that the MPS might vary by Rs. 2.755. Similarly the regression coefficient b2 and b3 is 5.565 and 0.417 respectively. This indicates that the MPS of banking sector will increase by Rs. 5.565 in average if DPS is increased by Rs. 1 and the MPS will increase by Rs. 0.417 if NWPS is increased by Rs. 1 and other two variables are kept constant for each case. The value of standard error of b2 and b3 is 2.609 and 1.472 respectively, which indicate that the value of MPS determined by the above model due to the cause of DPS and NWPS could vary by Rs. 2.609 and Rs. 1.472 respectively. The regression constant a with the value of 101.527 indicates that MPS of whole banking, finance and insurance sector does not go below Rs. 101.527 in average even if EPS, DPS and NWPS have value of zero. But the standard error of estimate of the model reveals that the estimation of MPS may vary by Rs. 162.839. The coefficient of determination (r2) explains that 60.3% variation in MPS of the whole sector is due to the variation in EPS, DPS and NWPS whereas 39.7% variation in MPS is caused by other external factors. The regression model is statistically significant at 5% level of significance as the significant F value is 0 which is less than 0.05.

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The status of the pricing of the stocks of particular company is evaluated by comparing the required rate of return and actual rate of return. If required rate of return is more than actual rate of return then the stock is called overpriced and if the actual rate of return is more than required rate of return of such stock then that stock is called under priced. Similarly, if the required rate of return equals actual rate of return then that stock is called equilibrium priced. The detailed calculation of required rate of return and Actual rate of return is presented in Annex.

Table: 5.16; Status of the Market Price of the Shares of the Sample

Companies

S. No Bet a ( Required Rate of Return (Rj) 14.6% 11.12% 10.89% 17.39% 16.33% 20.64% 20.29% 24.63% 30.97% 31.56% Actual Rate of Return (R) 30.06% 23.24% 19.36% 63.86% 61.81% 44.18% 27.78% 48.82% 29.45% 43.14% Status of the stock of the company Undervalue d Undervalue d Undervalue d Undervalue d Undervalue d Undervalue d Undervalue d Undervalue d Overvalued Undervalue d

Sector

1 2 3 4 5 6 Banking

NABIL Standard Chartered Himalayan Bank Nepal Bangladesh Bank Everest Bank

) 1.2 8 0.8 6 0.8 3 1.6 2 1.4 9 2.3 5 2.3 0 2.9 2 2.6 0 2.6 5 + ( Rm R f ) j

Annapurna Finance Peoples 7 Finance Finance 8 Universal Finance 9 Himalayan Insurance Insuranc e 10 Everest Insurance Required Rate of Return(R)= R f if R>Rj then the stock is under valued if Rj>R then the stock is over valued

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From the above summarized table, the required rate of return of NABIL bank is 14.6% where as actual rate of return is 30.06% during the study period. Hence the actual rate of return is higher than the required rate of return, the price of the stock of NABIL bank is called undervalued. Similarly, the required rate of return of SCB is 11.12% whereas actual rate of return is 23.24% during the study period. Since the actual rate of return is higher than the required rate of return, the price of stock of SCB is also called undervalued. In the same ground the required rate of return of HBL is 10.89% and the actual rate of return is Rs.19.36%. The actual rate of return is higher than the required rate of return. Since the price of the stock of HBL is also undervalued. In the same line the required rate of return of NB bank is 17.39% and the actual rate of return is 63.86% during the study period. Hence the required rate of return is less than the actual rate of return since the price of stock is called under priced. In the same ground the required rate of return of Everest Bank Ltd. is 16.33% and actual rate of return is 61.81%. It shows that the actual rate of return is also higher than the required rate of return during the study period. Since the stock of Everest Bank Ltd. is also undervalued. Similarly the required rate of return of Annapurna Finance is 20.64% and actual rate of return during the study period is 44.18%. It implies that the actual rate of return is more than the required rate of return. Thus it can be concluded that the stock of Annapurna Finance is undervalued. In the same way the required rate of return and actual rate of return of Peoples Finance during the study period is 20.29 % and 27.78% during the five years study period. It shows that the required rate of return is less than the actual rate of return thus it can be concluded that the stock of such company is also undervalued. As well as the required rate of return and actual rate of return of another finance co. i.e. Universal Finance & Capital Markets Ltd. is 24.63% and 48.82% during the study period. It reveals that the actual rate of return of such co. is higher than

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the required rate of return in the same period. So such price of stock of such company is called undervalued. Similarly the required rate of return of Himalayan General Insurance Co. as calculated above is 30.97% and the actual rate of return is 29.45% during the study period. It shows that the required rate of return is greater than the actual rate of return during the period. Hence it can be concluded that the stock of Himalayan General Insurance Co. is called overvalued during this study period. The required rate of return of Everest Insurance Co. during the study period is calculated 31.56% and the actual rate of return during the same period is 41.43%. Hence the actual rate of return is higher than the required rate of return .Therefore it can be concluded that the stock of Everest Insurance Co. during the study period is called undervalued. From above table in summarize it was found that the 5 banks taken as samples all were under-priced. Likewise, among the three finance companies taken as sample the stock of all finance companies are under-priced during the study period. Similarly the status of among two insurance companies taken as sample companies, one i.e. Himalayan General Insurance Co. was found overpriced and another one was found under-priced. So, in total among 10 companies taken as sample companies from three sectors the stock of 9 companies stock were under-priced and one from insurance sector was overpriced. None of the sample companies shares were equilibrium priced since the sample companys shares was not found reasonably priced during the study period. The main reason for under-valuation of the stock of the sampled companies is that the price of the stock had reached the highest point during the study period of the banking and financial companies. But the NEPSE index did not follow the same speed and the rate of Treasury bill issued by NRB also heavily decreased during the study period. It makes the actual rate of return of the sampled companies high and the required

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rate of return low. So, most of the sampled companies share price become undervalued during the study period. Similarly, the calculated required rate of return of the sampled companies seems too low to invest for the investors. As, finance companies and other cooperatives are offering about 9% to 12% return on fixed deposit with out any risk, no investors will invest on the stock with lower required rate or return by taking higher risk. The calculated required rate of return of the companies is low because of taking few years data for calculation.

To observe the impact of signaling and informational effect paired t-test has been conducted. For analyze purpose to see the impact of signaling factors on NEPSE Index during the period of major 5 events the 10 days market index of NEPSE of before and after the events has been taken as consideration for four events and remaining one event i.e. 5 Major Political parties movement before and after 7 Monthly index has been taken as consideration due to the long term effect in comparison to other events. These event wise data has been analyzed with the help of paired t-test. The details of calculation of paired t-test have been shown in Annexure and the summarized table of the calculation has been presented as below: Table: 5.17; Result from t-test

S.N o 1 2 3 Events(Researc h Variable) Ashwin-18,2059 event Ceasefire on Magh 15, 2059 Rupture of peacetalk and restarting war at Bhadra-10 , 2060 Nepal's entry on WTO on Sep-11, 2003 Five Major political parties' movement Tabulated Tvalue 2.262 2.262 2.262 Calculated Tvalue 1.969 6.3647 2.0429 Remarks Null Hypothesis Accepted Rejected Accepted

4 5

2.262 2.447

1.88 3.0724

Accepted Rejected

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From the above table it is clear that from the paired t-test, the tabulated value at 9 degree freedom for above first 4 events (S.No.1-4) at 5 % level of significance is 2.262 and last one, S.No. 5 for 6 degree freedom at 5 % level of significance level is 2.447. While considering the event of Ashwin 18, 2059, the calculated value of t is 1.969, less than tabulated value. So, null hypothesis is accepted and alternative hypothesis is rejected. It means that the signaling factors on the event of this Ashwin 18, 2059 has not affected the price of the stock based on the analysis of above data. Although the null hypothesis is accepted, the following chart shows that the NEPSE index in decreasing trend before the event and it start to increase after the event. The null hypothesis is accepted because the increasing and decreasing trend is within the 5% level of significance. Chart: 5.1

NEPSE Trend For previous 10 and next 10 days of Ashoj 18

224 223 222 221 220 219 218 217 216 215 214 1 2 3 4 5

Days

NEPSE index

10

Ceasefire between Maoist and Government and start of peace talk brought some sort of peace in that time in the country. By this reason favorable environment had seen in economy and most of the investors had feel peace and safety environment and all the investors were started thinking positively and hence the NEPSE index has risen during the period of ceasefire.

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This has been also verified by paired t-test that the tabulated value of paired t-test is less than the calculated value of t-test. Hence the null hypothesis was rejected at 9 degree freedom at 5 % level of significance. It revels that the cease fire even has played the vital role in change in the share price. So there is significant change in share price before and after the event of ceasefire and start of peace talk in the nation. This can also be proved by the following chart which compares the trend line between the index of NEPSE before 10 days of ceasefire and after 10 days of ceasefire. Chart: 5.2

NEPSE Trend For previous 10 and next 10 days of Ceasefire on Magh 15 first 10 days next 10 days

230 225 220 215 NEPSE Index 210 205 200 195 190 185 180 1 2 3 4 5 Days 6 7 8 9 10

As Maoist violated the ceasefire and then the re-war has started in the country in Bhadra 10, 2060 the NEPSE index starts to go down which can be seen in the following chart also. However in the paired t-test the calculated value of t is less than the tabulated value of t-test at 5 % level of significance and the null hypothesis was accepted. So, mathematically it revels that there is no significant change in share price before and after the event of breaking the cease fire and re-start of war. The result has came out due to taking the 10 days NEPSE index before and after the event but the breaking down of ceasefire was foreseeable before

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affected before the date of actual event. The trend line of 10 days NEPSE index before and after the breaking down of cease fire can be presented in the following chart.

Chart: 5.3

NEPSE Trend For previous 10 and next 10 days of Re-War on Bhadra 10

first 10 days next 10 days

214 212 210 NEPSE Index 208 206 204 202 200 198 196

1 2 3 4 5

Days

10

While considering the event of the declaration of Nepals entry in WTO, on Bhadra-25, 2060 (11-Sep, 2003), the calculated value of t is 1.88, lower than tabulated value. So, null hypothesis is accepted and alternative hypothesis is rejected. It means that the signaling factors on the event of Nepals entry in WTO have not affected the price of the stock based on the analysis of above data. The trend of the index on the NEPSE for the previous 10 days and after 10 days of the event of Nepals entry in WTO at Bhadra 25, 2060 can also be presented in the following chart. Although the chart shows that the price index has increased slightly after the event, it is still under the 5% level of significant. So, the null hypothesis is accepted.

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Chart: 5.4

N PSEtrend for previous 10 and next 10 days of N E epal's entry in W TO first 10 days next 10 days

212 210 208 Index 206 204 202 200 198 196 1 2 3 4 5 D ays 6 7 8

10

Due to the political change in the country after the event of Ashwin 18 2059, the major political parties are against this action and started to protest this. By this reason political instability has seen in the country during this period. So the investors have also affected by this cause and the trading of stocks in NEPSE has badly affected. This has been also proved by the paired t-test, as null hypothesis rejected. That the tabulated value at 6 degree freedom at 5% level of significance is 2.447 whereas the calculated value is 3.0724 which is greater than the tabulated value. It revels that the share price has been affected by the movements of major five political parties in the country. The following chart compares the NEPSE index of seven months before the political parties movement and NEPSE index of seven months after the commence of the movement. Chart: 5.5

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NEPSE Index for Previous 7 Months and Next 7 Months of Five Parties' Movement

230 225 220 NEPSE Index 215 210 205 200 195 190 185 1 2 3 4 Months 5 6

Questionnaire Analysis To find out the investors attitude toward the pricing of the securities and the relevant information regarding the prices of stocks, different types of questionnaires has been prepared and distributed to different sectors respondents. To collect the relevant data, the questionnaires have been distributed to the respondents on stratified random sampling basis. All together 100 sets of questionnaires were presented in front of the respondents. To get the quick and full response, all the questions were objective types. Out of 100 questionnaires, 83 were responded. Investment Pattern in Shares of Listed Companies The first question was asked regarding the investment pattern of shares of listed companies. Out of 83 respondents 64 which is 77.00% have given their positive answer i.e. yes that means they have invested in the shares of the listed companies. And 19, which is 23% have given their negative answer i.e. No. Table:5.18; Investment Pattern

Response Yes No Total No. Of Investors 64 19 83 % 77% 23% 100

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Investors Interest in Sector Wise Investment Similarly in our second question was about the investors opportunity on different sector wise investment. For this question has been prepared with two sectors i.e. Security sector and non- security sector. Out of them in security sectors weight is 77% and non-security sectors weight is 23%. On which in security sector 35 which is 55% respondents out of 83 said better opportunity in banking sector and least 1 which is 2% of the respondents said least opportunity in hotel sector. Based on the present economic and political situation and unsatisfactory performance of tourism sector the respondents have given the minimum weight for the hotel sector. Similarly, the dividend distributed by banking sector as well as better performance of banking sector are the major causes for the respondents to choose it. Similarly in non-security sector most of investors 9 i.e.47% said for fixed assets investments and least 1 i.e.5% investors said for business venture. By analyzing the present political as well as economical situation of the country, respondents are not interested to invest for business venture. So, only 1 of the total respondents prefers for business venture. The summarized results can be presented in following table.

Response No of respondents Security Sector Bank 35 Finance Co. 11 Insurance Co 9 Manufacturing 2 Trading 3 Hotel 1 Others 3 Total 64 Non Securities Sector Bank Fixed Deposit 7 % 55% 17% 14% 3% 5% 2% 5% 100% 37% 90 Weight ed

77%

9 1 2 19 83

23%

100%

Purpose of Holding Shares of the Company: Investors were asked for the cause of purchasing shares and the options were given as a) Dividend, b) Social Status, c) Price Appreciation and d) To become director. Among the 64 respondents who invested in shares, 23 i.e. 36% of the respondents said they own shares for dividend. Similarly 8 of the respondents i.e. 13% own shares in lieu of social status in the society and major of the respondents, 33 which is 52% of the total respondents own shares for price appreciation in future. None of the respondents were interested to own shares to become director of company. It revels that major of the respondents own shares of companies for price appreciation. The following chart summarize above description. Chart: 5.6

Purpose of Ow ning Sha res

0, 0% 23, 36% 33, 51%

8, 13%

Trading of Shares in the Secondary Market: Investors were asked if they have ever sold their shares in secondary market or not. Out of 64 respondents who have invested in shares, 23 of them i.e. 36 % of the respondents have sold their shares in secondary markets and 41 i.e. 64% of the respondents have never sold any shares in secondary market they have owned.

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S.N o 1 2 Research variables Yes No Total No. Of investors 23 41 64 % 36% 64% 100%

Again the investors were asked for the reasons for selling shares they were owning and the option for their response was a) For personal need, b) To buy other stocks c) Expectation of price fall, d) No payment of dividend by the company and e) Current price appreciation. Of the total 23 investors who sold their shares in secondary market, 7 which is 30% have sold their shares to fulfill their emergency personal needs. Similarly 3 which is 13% each of investors who sold their shares in secondary market sold their shares to buy other securities and expectation of future price fall. It was found that the cause to sell the securities to buy other securities and expectation of future price fall is equal. In the same ground 2, which is 9% were sell their securities due to no payment of dividend by the company. Majority of the respondents sold their shares because of current price appreciation. The no of respondents is 8, 35%. Chart: 5.7

Reasons for selling shares in secondary market

Emergency Personal Need To buy other securities

8

35%

30%

9%

13% 13%

3 3

The next question for the investors was if they have bought shares from secondary market. Of the total 64 investors who invest their money in securities, 18 that is 28 % have purchased shares from secondary

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market and 46 that is 72% of them have not purchased shares from secondary market. This result has been expressed in the following table. Table: 5.21; Investors Purchasing Shares form Secondary Market S.No Research . variables No. Of investors %

1 2 Yes No Total 18 46 64 28% 72% 100%

Similarly, the respondents were asked for reasons to purchase shares from secondary market and their available options as answers were a) high rate of dividend b) expected price appreciation c) to invest excess money and d) speculative purpose. Of the 18 investors who have purchased shares from secondary market, 6 that is 33% purchased the shares to get the higher rate of dividend declared by the company. Similarly, 7 which is 39% of them invested their money in shares through secondary market because of the future expected price gain. Only one which is 6% of the respondents answered that he/she purchase the shares form secondary market to utilize excess money he/she holding. 4 which is 22% of the investors who purchased shares from secondary market for speculative purpose. Table: 5.22; Causes for Investing in Secondary Market S.N No. Of o. Research Variables investors %

1 2 3 4 For high rate of dividend Expected price appreciations To invest excess money Speculative purpose Total 6 7 1 4 18 33% 39% 6% 22% 100%

Investors Interest on Price of the Shares To know the interest of investors towards their shares price, one question was presented as how often the investors seek the prices of securities they have purchased. Of the total 64 respondents, 12 which is 19% of the total investors told that they look for the price of their securities daily. Similarly, 27 i.e. 42%, 4 i.e. 6%, 21 i.e. 33% and 2 i.e. 3% of the investors seek the price of their shares weekly, monthly,

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seldom and never respectively. The result of this question is presented in the following table. Table: 5.23; Investors Seeking for Share Price

S.N o 1 2 3 4 5 Research variables Daily Weekly Monthly Seldom Never Total No. Of investors 12 27 4 21 2 64 % 19% 42% 6% 33% 3% 100

Factors Affecting Price of Shares Regarding the influencing factors for price fluctuation of share in capital market different investors gave different views and their own ideas. 26 of the total 83 respondents, that is 31% gave their views as dividend as the influencing factors, 19 that is 23% said earning per share, 11 which is 13% said political stability of the country,14 which is 17% said economic growth of the country, 5 that is 6% said world wide trend, 2 which is 2% of the respondents said volume of transactions and 6 which is 7% said rumors. Theoretically, DPS and EPS are the major factors to influence the share price of a company which is also reflected in the respondents view. Table: 5.24; Factors Affecting Price of Shares

1 2 3 4 5 6 7 Research variables Dividend Earning Per Share Political Stability Economic Growth World Wide Trend Volume of Transactions Rumors Total No. Of investors 26 19 11 14 5 2 6 83 % 31% 23% 13% 17% 6% 2% 7% 100%

Investors Views Regarding the Returns from their Investment To find out how much the investors are satisfied from the returns from their investments, question was presented to the respondents as the level of return from the investment presently getting in comparison their

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expectation. None of the respondents replied that they are getting very high return however 5 out of 64 which is 6% replied that they are getting high level of return, similarly 22 that is 27% said moderate, 25 that is 30% low and 12 that is 14% very low. The results is presented in the following Table: 5.25; Satisfaction form the Return of Shares S.N Research No. Of o. variables investors %

1 2 3 4 5 Very High High Moderate Low Very Low Total 0 5 22 25 12 64 0% 6% 27% 30% 14% 100%

The major findings based on the analysis are presented as follows: 1. According to the coefficient of co-relation the relationship of MPS on EPS, DPS, NWPS and current years DPS of HBL, NB bank, Everest bank, Universal finance, Himalayan General Insurance and Everest Insurance are all positive. Similarly, in case of NABIL bank and Peoples Finance, the relationship of MPS on EPS, NWPS is positive and with last years dividend is negative. But the calculation shows that there is no relationship between MPS and DPS of NABIL bank where as People Finance has not declared any dividend during the study period. In case of SCB, the three financial indicators, DPS, NWPS and last years dividend is negative and there exists no relation with EPS. Similarly, for the Annapurna Finance the relationship of MPS with EPS is negative where as the relation is positive with DPS, NWPS and last years dividend. Disregarding the exceptional case, it is found from the calculation of correlation coefficient that in average for all companies, EPS, DPS and NWPS has good positive relationship with MPS and EPS is the most influencing factor among them. 2. According to the multiple regression, during the five years study period, the DPS and NWPS of NABIL bank is negatively influenced

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MPS. Similarly, the analysis shows that the combined effect on MPS of EPS, DPS and NWPS of NABIL bank is 47.10% which indicates that the change in MPS of the NABIL is due to the combined effect of EPS, DPS and NWPS and 52.90% change in MPS is caused by other external factors. The calculated value of significant f (0.836), shows the calculated model of multiple regression is statistically insignificant at 5% level of significance. 3. The combined effect on MPS of EPS, DPS and NWPS of SCB is 93.20% which indicates that the change in MPS of the SCB is due to the combined effect of EPS, DPS and NWPS and only 7.80% change in MPS is caused by other external factors. The regression model is statistically insignificant at 5% level of significance as the value of significant f is 0.328 which is greater than 0.05. 4. The regression model for HBL shows that EPS, DPS and NWPS significantly affected the MPS of HBL. Only 15.8% variation on MPS is caused due to the other factors than EPS, DPS and NWPS. But this relationship established by regression model is statistically insignificant at 5% level of significance as the value of significant f is 0.49 which is greater than 0.05. 5. The combined effect on MPS of EPS, DPS and NWPS of NB bank is 98.10% which indicates that the MPS of NB bank is most significantly affected by these factors during the study period. The regression model is statistically insignificant at 5% level of significance as the value of significant f is 0.19 which is greater than 0.05. 6. The pricing behaviour of MPS of Everest Bank is significantly influenced by the combined effect of EPS, DPS and NWPS of the company during the study period. And only 6.00% change in MPS is caused by other external factors different then EPS, DPS and NWPS. The regression model is statistically insignificant at 5% level of significance as the value of significant f is 0.309 which is greater than 0.05.

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7. Different form the sample banking companies, the fluctuation in the MPS of AFCL is less affected by the combined effect of EPS, DPS and NWPS and 88.00% variation in MPS is caused by other irrelevant factors. And the regression model is statically insignificant at 5 % level of significance. 8. The combined effect on MPS of EPS and NWPS of Peoples Finance Co. Ltd. is 46.20% which indicates that the change in MPS of the Peoples Finance Co. is due to the combined effect of EPS and NWPS and only 53.80% change in MPS is caused by other external factors. Since, Peoples Finance did not distribute any dividend during the study period; the affect of DPS on MPS could not be calculated. The regression 0.05. 9. The change in MPS of UFL due to the combined effect of EPS, DPS and NWPS by 98.90% and 1.10% variation is caused by other irrelevant factors. And the regression model is statistically insignificant at 5% level of significance as the value of f is 0.134. 10. The change in MPS of Himalayan General Insurance Co. due to the model is statistically insignificant at 5% level of significance as the value of significant f is 0.538 which is greater than

combined effect of EPS, DPS and NWPS by 93.10% and 6.90% variation is caused by other irrelevant factors. The regression model is statistically insignificant at 5% level of significance that the value of f is 0.33. 11. As per the result of whole banking sector, in average 61.9%

change in the MPS of the banking sector companies is due to the effect of the change in EPS, DPS and NWPS of the banking companies only 39.10% variation in MPS is caused by the other irrelevant factors. So, the calculation shows that EPS, DPS and NWPS of banking sectors companies are more important in the formation of MPS than other factors. Similarly, the regression model is also statistically significant at 5% level of significance that the value of f is 0.

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12.

whole Finance Co. sector is less which is 40.1% affected by financial indicators like EPS, DPS and NWPS and more which is 59.9% due to the other factors. The regression model is statistically insignificant at 5% level of significance. 13. As per the result computed from the combined effect on MPS of

EPS, DPS and NWPS as a whole Insurance sector is 80.60%, which indicates that in average, the change in MPS of Insurance companies is due to the combined effect of EPS, DPS and NWPS and only 19.40% variation is caused by the other factors. The regression model is statistically significant at 5% level of significance that the value of f is 0.031 which is greater than 0.05. 14. The result computed from the whole sampled companies shows

that the change in MPS of the sampled companies during the study period is affected due to the change in EPS, DPS and NWPS by 60.3% and 39.7% change in MPS is due to the other factors than these financial indicators. It shows that in average, the pricing behaviour of the sampled companies is significantly affected by EPS, DPS and NWPS. This relationship model is also statistically significant at 5% level of significance. 15. With respect to the calculation of actual rate of return and required

rate of return, 9 companies out of 10 have actual rate of return are more than required rate of return. So, these companies stock price are under priced where as the actual rate of return of Himalayan General Insurance is less than required rate of return; thus its stock price is found over priced. From the calculation it is found that in average the required rate of return is low and investors would not invest in shares for such low return instead they will invest in fixed deposit of banking and financial institutions which is less risky compared to shares. But this result occurs due to the calculation of only five years data and drastically decreasing interest rate and risk free rate.

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16.

It is find out from the T-test that the political event of Ashwin-18, 2059 has not significantly affected the stock price at NEPSE.

17.

investing activity, the share price on NEPSE has been positively affected by the event of Ceasefire on Magh 15, 2059 as the alternative hypothesis accepted that null hypothesis rejected at 5% level of significance at 9 degree of freedom. It shows that Nepalese investors are aware of the political and other environment of the country. 18. The signaling and informational factors on the event of rupture of

peace talk and re-start of war on Bhadra 10, 2060 has not affected the price of the stock in NEPSE based on the analysis as the null hypothesis accepted at 5% level of significance at 9 degree freedom. 19. The share price in NEPSE has not been affected due to the

signaling factors on the event of Nepals entry in WTO on 11-Sept. 2003 as the null hypothesis accepted at 5% level of significance at 9 degree freedom. 20. The NEPSE index has affected by the event of five major parties

political movement as the alternative hypothesis accepted at 5% level of significance and 6 degree freedom. 21. On analyzing the primary data collected from the respondent most

of the investors were asked for their preference of investment sector major portion of them choose the banking sector and minor for hotel sector and business venture. 22. It was found that the investors major motives for owning the

shares of company are for better price appreciation and to receive the dividend. 23. An evident find out from the study is that Nepalese stock market

has the shortage of professional investors. It seems that investors buy the stock only for dividend and they are not interested on speculative

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motive. Some investors are interested on the pricing behavior but they are not interested on trading of the shares in secondary markets. Similarly, people are only investing in shares with the excess money they have over their expenditure. So, Nepalese security market has the shortage of professional investors. 24. Major of the investors are not trading in secondary market and

those who trade in secondary market, sold their shares due to the expected price appreciation and few of the investors sell their shares due to the non declaration of the dividend by the company. 25. As per the respondent major of the investor who purchases the

shares from the secondary market, purchase it due to the high rate of dividend. 26. The respondents are aware about the price of their share which

they own that major of the respondents used to seek the price of their shares on weekly basis on secondary market. 27. It has been proved that the major influencing factor to the price of

the share is current dividend that respondents given the high weight for dividend and lowest weight was given to the volume of transaction out of seven options. 28. As per the respondents investors are not satisfied for the level of

return which they are getting as major of the respondents replied for level of return to low out of the five options.

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This chapter presents the summary and conclusions drawn form the analysis of the study. The study was conducted to find out the behavior of stock price with respect to the movement of various financial indicators, certain external events and other factors. Similarly, the study also tried to find out the investors response toward the change in the MPS of their stock. For these purpose, 10 sampled companies were selected and the study was based on the five years data of the corresponding selected companies from 1997-98 to 2001-02. Various statistical as well as financial tools were adopted as test methodology.

CHAPTER 6

6.1 Summary

Price of security is the outcomes of investors psychology. The psychology of investors is affected by various factors. Here in Nepalese market, dividend and price appreciation of stock is major factors for the investors to decide about purchasing of shares. Along with the DPS and price appreciation, EPS, NWPS, market rumors, political and economic environment etcetera are the other factors to influence the buying and purchasing behavior of the investors. But one must look into financial status of organization before making investments. If the organization is not financially strong then it is likely to loose ones investment one day or other. The first objective of the study is to find out the relationship of market price of share (MPS) with various financial indicators like EPS, DPS, NWPS and last year's dividend. To find out the above stated objective financial as well as statistical tools have been used. Among the 10 selected companies, the most positive relationship of MPS with EPS is 0.79 of NB bank and the least relationship of MPS with EPS is -0.22 of UFL. Similarly, in case of DPS, the highest relationship is 0.97 of NB bank and lowest relationship is -0.29 of Everest Insurance Company. With regard to the NWPS, NB bank's MPS has most positive relationship and the lowest

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relationship is -0.55 of SCB. In average EPS is highly co-related with MPS and DPS is least correlated with MPS of selected companies. Similarly, to find out the impact of the combined effect of EPS, DPS and NWPS on MPS, multiple regressions analysis has been conducted with help of SPSS software. For this purpose r2 has been calculated which denotes the combined effect of EPS, DPS and NWPS on MPS. As per the calculation, the highest co-efficient of determination (r2) of UFL is 98.9% which means the MPS of UFL is mostly influenced by the combined effect of EPS, DPS and NWPS among the all selected listed companies during the study period. Only 1.10% variation in MPS is due to the other extraneous factors. Similarly the lowest co-efficient of determination (r2) is 46.20 % of PFL which indicates that the MPS of the PFL is least influenced by combined effect of EPS, DPS and NWPS among the all selected listed companies. 53.80% variation in MPS of the Company is influenced by the other external factors. The co-efficient of determination(r2) of whole selected companies which is 60.3%, shows that in average, the MPS of the companies are influenced by the combined effect of EPS, DPS and NWPS and this relationship is also statistically significant at 5% level of significance. The next objective of the study is about the identification of the price of stock whether it is over priced, under priced or equilibrium priced. To find out the pricing status of stocks, actual rate of return and required rate of return was compared. Generally, the trend is that the MPS of public quoted companies is above their book value. The market value is determined by the supply and demand functions. However, in an efficient market MPS fully reflects all the historical information publicly available. As per the presentation, the highest required rate of return is 31.56% of Everest Insurance and the lowest required rate of return is 10.89% of Himalayan Bank Ltd. Similarly, in case of actual rate of return, NB bank has highest return that is 61.86% and the lowest is 19.36% of Himalayan Bank Ltd. From the comparison it has been found that actual rate of return is higher than the required rate of return of 9 selected

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companies out of 10. Only one HGI companys actual rate of return (29.45%) is less than the required rate of return (30.97%). It reveals that the stock price of 9 companies out of 10, are under priced and the only Himalayan General Insurance Companys stock price is found over priced during the study period. Similarly, none of the sample companies stocks are found to be equilibrium priced. The main reason for under-valuation of the stock of the sampled companies is that the price of the stock had reached the highest point during the study period of the banking and financial companies. But the NEPSE index did not follow the same speed and the rate of Treasury bill issued by NRB also heavily decreased during the study period. It makes the actual rate of return of the sampled companies high and the required rate of return low. So, most of the sampled companies share price become undervalued during the study period. Signaling and informational factors also play the major role in the pricing of the security in secondary market. But it depends on the events occurred in the country. To find out the signaling and informational effect on share price, paired T-test was conducted to get the result of third objective of the study. For this purpose five major events occurred during the last year of the study period in the country has been taken and hypothesis was set whether the events have influenced the NEPSE index or not. As per the calculation three null hypothesis were accepted which means the NEPSE index was not affected by the three corresponding events of Ashwin-18, 2059, Rupture of peace talk and starting of re-war at Bhadra -10, 2060 and the event of Nepals entry in WTO at Sep-11, 2003 respectively. Similarly, the remaining two null hypotheses were rejected. It shows that the two events, ceasefire on Magh-15, 2059 and the event of five major political parties movement have influenced the NEPSE index. The decision for investment largely depends on the information about the performance of the company. In general, most investors prefer to buy shares of those companies whose earning are very attractive and

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dividend pay out ratio is high. However, rational investor analyzes not only earnings but also various information regarding the companies management and their dividend policy, economic situation, market condition and many other factors before actually making an investment. But as per the questionnaire analysis, it is found that most of the investors invest in shares for dividend and price appreciation and most of them are not interested about the other indicators which could affect the price of share. It also seems from the questionnaire analysis that the investors are conscious about the market price of the share they have bought as many investors seek for their shares price daily or weekly. Although they seek for their share price, most of the investors are not trading their shares in secondary market, which shows that most of the investors are holding their shares for only dividend and they are not using the change in share price for speculative purpose.

6.2 Conclusion:

The study shows that in average market price of share of the sampled companies are seems to be influenced by the combined effect among the analyzed financial indicators like EPS, DPS and NWPS. However current year's dividend has minimum role in the fluctuation of the market price. But these indicators are not alone to influence the price of share and there are other external factors such as economic situation, economic growth, political situation and other major events occurred in the country are also responsible for the pricing behaviour of the stock of the sample companies. Among the analyzed financial indicators EPS seems to be most closely related with the market price of share. Most of the sample companies stock price found to be under valued because their required rate of return is lower than the actual rate of return. This happens because of the decreasing trend of the risk free rate of return which causes the required rate of return lower and the increasing trend

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of the price of the sampled companies which makes the actual rate of return high. Similarly, the study also shows that the some major events occurred in the country also effect on the market price of share. So, the political, economical and social environment has also close relationship with the pricing behaviour of share and they influence the stock market with respect to the importance of the event. The study also shows that Nepalese investors are more conscious towards the dividend and price appreciation of the shares they are investing but most of the investors are only using buy and hold strategy as only few of them are trading their shares in secondary market. This shows that there lacks professionalism in Nepalese investors.

6.3 Recommendations:

The findings of the study may be an important information for those who concern, directly of indirectly, with the stock market activities. Thus, the following recommendations can be outlined for the concerned:

1.

From the study it seems that Nepalese investors have limited knowledge about security market. It lacks of professional investors. So, the concerned authority is recommended to make aware about the security market to the general public so that they are interested to invest in security market and the previous investors could change as professional investors.

2. Most of the stocks of banking and finance companies are undervalued in the stock market. So, investors are recommended to buy these undervalued stocks by selling other overvalued stocks. 3. As per the study, investors are trading the stocks with-out proper analyzing of the financial indicators of these companies. So, investors are recommended for the detail study of the financial

105

indicators of those companies before trading the stocks of such companies. 4. The price fluctuating trend is not predictable by general investors. So, investors are recommended to get the consultancy service from the investment experts while making the investment.

5.

Signaling factors should be analyzed on regular basis by the concerned authority so that the future movements of price can be predicted from the side of analyst and investors.

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