Behavior and Determinants of Equity Prices of Electronic Companies

Prof. Gaurav Chhabra *Faculty-Prestige Institute of management,Dewas E-mail ID-gaurav.chhabra@pimdewas.org **Prof. Rashmi Sharma Faculty-Prestige Institute of management,Dewas E-mailID-rashmi.sharma@pimdewas.org

Abstract:
In this paper an attempt has been made to study the behavior of share prices, because predominance of primary sector, low rate industrialization, imperfect capital market and ignorance of investors to invest in share market. The present study seeks to various dimensions in a quantitative framework in improving the understanding of stock prices and their behavior in broadening the base of share market, which may be helpful in creating a better investment climate in the country. Only the private sector enterprises for the years 2001 to 2008 are covered in the present study. The empirical relationship has been measured between equity prices and various explanatory variables i.e., book value, covers, DPS, EPS, P/E Ratio, Yield and growth measured in terms of sales.

Key words: DPS,EPS, P/E Ratio, Yield and growth.

Behavior and Determinants of Equity Prices of Electronic Companies Introduction:

The mobilization and the investment of the funds are the two major tasks the management has to perform in any organization. Investment is the economic activity of committing a set of resources with the expectation of receiving a stream of benefits over a reasonable long period of time in the future. Since investment in securities are recoverable, investment ends are transient and investment environment is fluid, the reliable basis for reasoned expectation become more and more vague as one conceives of the distant future. Investment decisions may be tactical and strategical. A tactical investment decisions generally involves a relatively small amount of funds and does not constitute a major departure from what the firm has been doing in the past. Acceptance of a strategic investment will involve a significant change in the companies expected profits and in the risks to which these profits will be subjected. These changes are likely to lead shareholders and creditors to revise their evaluation of the company. Investment choices or decisions are found to be the outcome of three different related classes of factor. The first may be described as factual or informational premises. Factual premises of investment decisions are provided by many streams of data which taken together represent to an investor the observable environment, general as well as particular features of the securities and firms in which he may invest. The second class of factor entering into the investment decisions may be described as expectation premises. Expectations relating to the outcomes of alternative investments are subjective and hypothetical in any case per day in any case but their foundations are necessarily provided by the environmental and financial facts available to investors. These limits not only the range of investments which may be undertaken but also the expectation of outcome which may legitimately be entertained .The third and the final class of factors may be described as valuation premises. For investors, generally these comprise the structure of subjective preferences for the rise and regularity of specific investments or considerations of investments, as these are appraised from time to time. Investment is concerned with the purchase and sale of financial assets and an attempt of the investor to make logical decisions about the various alternatives in order to earn suitable return. In a classical treatment of decision - making, decisions are said to be encountered under four conditions: Certainty, Risk, Uncertainty, Conflict. Decisions are being made under conditions of certainty when there seems to be only one consequence of outcomes of each option available to the decision maker. Decisions are said to be taken under risk when the decision-maker has faced the same situation repeatedly and can reasonably construct a relative frequency distribution for occurrence of these states of nature. The main sources contributing to risk are changes in the external environment structure are also known as systematic risk and internal factors are called unsystematic risk. Decisions are said to be under uncertainty when neither the number of possible futures nor their probabilities of occurrence are known to the decision maker. The condition of conflict arises when the only information about the occurrence of the state of nature is that an opponent is present who will act to harm the decision-maker. The investor has various alternative avenues of investment for his savings to flow in accordance with his preference. Saving flow into investment for a return but savings kept as cash are barren and do not earn anything. Savings are invested in assets depending on their risk and return characteristics.

NEED AND SCOPE OF THE STUDY

A Very little empirical work has been made to study the behavior of share prices because of pre-dominance of primary sector, low rate of industrialization, imperfect capital market and the ignorance of investors to invest in share market. Although there are extensive quotations of share market prices with different newspapers, but most of the available data has not been systematically processed and analyzed. The present study, therefore, seek to examine various dimensions in a quantitative framework which may help in improving the understanding of stock prices and their behavior in broadening the base of share market and for creating a better investment climate in the country. The scope is limited to the private sector enterprises only. The reference period for the study relates to the year 2001 to 2008 and the data was collected from Bombay stock exchange official Directory. We have selected seven exploratory variables, viz. Book value, Covers, Dividend per share, Earning per share, Price Earning Ratio and yield. An attempt has been made to test the impact of the independent variables on market price of share.

Objectives
The main objectives are: To examine the empirical relationship between equity prices and various explanatory variables. To study the changes in the above relationship over the period of grouped data of all the industries.

Sample Selection
Sampling was done in two stages. Firstly, five industries were studied, namely, Electronics. Secondly, while selecting sample of companies from the selected 7 industries, the following conditions were adhered to: (i) The necessary financial data required for calculating the measure of dependent and independent variables from 2001 to 2008. (ii) The company did not skip dividend for any year. (iii) The average P/Es for any three successive years, in the mentioned period was not zero or negative. Therefore, 7 companies from Electronics are selected for the study.

Methodology
The interpretation and significance of variables largely depend upon how the various dependent and independent variables are measured.

Market Price (P)

Because of changes in the buying and selling pressures, daily price fluctuation arises and it becomes difficult to decide as to which market price of share during the financial year of the firm has been taken. P = PH + PL 2 Where PH = Highest market price during the period, and PL = Lowest market price during the same period.

Book Value (BV)

BV = Paid up capital+ Shareholders reserves Intangible assets-Preference dividend in arrears No. Of Equity Shares Subscribed

Dividend per Share (DPS)

Dividend is the portion of the profit after taxes, which is distributed to the shareholders for their investment and bearing risk in the company. It has a significant influence on the market price of share.

Earning Per Share (EPS)

EPS = Net profit after tax Preference dividend No. Of equity share subscribed

Price Earning Ratio (P/E)

P/E = Market Price of Share Earning per share

This ratio enables an investor to make an approximate calculation of the time required to cover his investment in a companys stock.

Cover (C)
It shows the extent to which the dividend per share is protected by the earnings of the company. C = EPS DPS The reciprocal of the cover is known as dividend pay out ratio.

Yield (Y)
Y = DPS Market price per share

Growth (G)
G = St St-1 St-1 Where St = Net sales in the current year, and St-1 = Net sales in the previous year.

Tools and Techniques used

To achieve the objectives of the present study, the following relationship of independents variable with dependent variable is formed P = f (BV, DPS, EPS, C, G, P/E, Y) While, for studying the impact of explanatory variables as dependent variables, we have employed the following statistical techniques.

Mean Values
Mean values of the dependent and independent variables have been calculated. The mean values are compared with the values of the grouped data of the different variables over the time period and to study the effect of independent variables on the dependent variables.

Standard Deviation
Standard deviation of dependent and explanatory variables has also been calculated to study the variation in various variables from mean values and also to study the consistency and homogeneity in data collection.

Correlation
The analysis of the degree of linear association between various variables used was carried out with the help of Karl Pearsons correlation method. The lower the value of r the lower is the degree of linear relationship between the variables. The value of r needs to be interpreted carefully because a low value of r may be due to the non-linear relationship between two variables. The significance of the correlation coefficient is tested with the help of t-test distribution at 1 and 5 per cent level of significance.

Regression
A linear multiple regression models has been selected to measure the combined effects of independent variables on the dependent variables. The general form of multiple Linear Equation is: Y = b0 + b1X1+ b2X2+ + bnXn

Where Y = dependent variable, X1, X2, X3 = independent variables, b0 = regression constant, and b1, b2bn = regression coefficients of independent variables. The statistical significance of regression coefficients was worked out and tested by 2 applyingt test. The coefficient of determination R was computed to determine the percentage variation in the dependent variables. Also, with a view to account for the loss of degree of freedom resulting from the -2 2 inclusion of additional explanatory variables, the R computed the R . The F values were also computed to test the significance of R2 with F distribution at 1 and 5 percent significance level.

Analysis and Interpretation Mean

It is an average which shows the value of the data by representing single figure. The mean of dependent & independent variables for the period ranging from 2001 to 2008

MEAN VALUES OF DEPENDENT AND INDEPENDENT VARIABLES(2001-2008) YEAR 2008 2007 2006 2005 2004 2003 2002 2001 P 103.98 127.07 126.96 103.9 55.02 37.21 38.3 33.09 EPS 16.2 8.78 7.18 7.03 6.99 6.96 5.98 6.2 P/E 6.41 14.47 17.6 14.7 7.87 5.3 6.40 5.33

Table -I Mean value of market price (P) and EPS showed a positive correlation in almost all the year ,P/E ratio fluctuates very widely for the selected period ranging from 5.3 in2003 to

17.6 in 2006 while the higher yield was depicted in the initial years of the study whereas it declined after that.

COMPANY NAME LG SONY PHILIPS VIDEOCON PANASONIC WHIRLPOOL SAMSUNG

GROWTH RATE

0.23 -0.21 -0.015 0.157 -0.0043 -0.03 0.153

Standard Deviation: It measures the absolute variability of a distribution from their

means. A small standard deviation means high degree of uniformity of the observation as well as homogeneity of a series and vice versa. Value of standard deviation as given in the table II shows that market price P was highly deviated from its value where as growth G deviated least from its value
Table II
Report Std. Deviation P EPSPERATIPO 33.09 . . 37.21 . . 38.30 . . 55.02 . . 103.90 . . 103.98 . . 126.96 . . 127.07 . . Total 3.35231 4.98073

Correlation: Correlation for seven electronic companies over the period under study is
given in table III. The correlation is drawn between independent variables (EPS, P/E Ratio) and dependent variable (MP)

Table III
Correlations P EPSPERATIPO Pearson 1 .426 .843 Correlatio n Sig. (2. .293 .009 tailed) N 8 8 8 EPS Pearson .426 1 -.117 Correlatio n Sig. (2.293 . .782 tailed) N 8 8 8 PERATIP Pearson .843 -.117 1 O Correlatio n Sig. (2.009 .782 . tailed) N 8 8 8 ** Correlation is significant at the 0.01 level (2-tailed). P

Regression Analysis: Multiple Linear regression equation results are drawn from
independent and dependent for selected industries. The results are exhibited in table IV

Table IV
Model Summary Model R R Square Adjusted Std. Error R Square of the Estimate 1 .994 .987 .982 .66112 a Predictors: (Constant), EPS, P

The coefficient of determination has shown 98.7% variation is explained by all the independent variables. Adjusted R square only 98.2% in share price.

Conclusion:
It is observed from the tables that from the year 2001 to 2008 the mean value of market price has grown considerably. It is also observed that there is a fall in mean value of market prices in the year 2008 as compared with 2006 and 2007 due to economic recession in the country. The analysis shows the positive association of market price, EPS, and P/E ratio.

References:
Bibliography:
Research Methodology in Management; Deep & Deep Publication Pvt. Ltd. Donald E Fisher & Ronald J Jordan, Security Analysis & Portfolio Management, Prentice Hall of India Pvt. Ltd, New Delhi. V. A Avdhani, Investment and Security Market in India, Himalaya Publishing House New Delhi

Webliography: www.in.finance.yahoo.com www.money.rediff.com