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Behaviour & Determinants of EPOEC

Behaviour & Determinants of EPOEC

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Published by: Rashmi Sharma on Jun 14, 2012
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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

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.

• Risk. the reliable basis for reasoned expectation become more and more vague as one conceives of the distant future. 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. . 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. generally these comprise the structure of subjective preferences for the rise and regularity of specific investments or considerations of investments. Investment choices or decisions are found to be the outcome of three different related classes of factor. 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. • Uncertainty. general as well as particular features of the securities and firms in which he may invest.The third and the final class of factors may be described as valuation premises. The second class of factor entering into the investment decisions may be described as expectation premises. Investment decisions may be tactical and strategical. These limits not only the range of investments which may be undertaken but also the expectation of outcome which may legitimately be entertained . • Conflict. For investors. 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. Factual premises of investment decisions are provided by many streams of data which taken together represent to an investor the observable environment. 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. These changes are likely to lead shareholders and creditors to revise their evaluation of the company. 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.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 ends are transient and investment environment is fluid.making. as these are appraised from time to time. decisions are said to be encountered under four conditions: • Certainty. The first may be described as factual or informational premises. Saving flow into investment for a return but savings kept as cash are barren and do not earn anything. In a classical treatment of decision . Savings are invested in assets depending on their risk and return characteristics. 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. 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. 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. 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. The investor has various alternative avenues of investment for his savings to flow in accordance with his preference.

Secondly. . in the mentioned period was not zero or negative. Although there are extensive quotations of share market prices with different newspapers. (ii) The company did not skip dividend for any year. The scope is limited to the private sector enterprises only. Electronics. Methodology The interpretation and significance of variables largely depend upon how the various dependent and independent variables are measured. Price Earning Ratio and yield. Earning per share. imperfect capital market and the ignorance of investors to invest in share market. Dividend per share. We have selected seven exploratory variables. (iii) The average P/E’s for any three successive years. Therefore. An attempt has been made to test the impact of the independent variables on market price of share. but most of the available data has not been systematically processed and analyzed. low rate of industrialization. 7 companies from Electronics are selected for the study. Book value. The present study. Covers. Firstly. five industries were studied. 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. • To study the changes in the above relationship over the period of grouped data of all the 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. therefore. The reference period for the study relates to the year 2001 to 2008 and the data was collected from Bombay stock exchange official Directory. Objectives The main objectives are: • To examine the empirical relationship between equity prices and various explanatory variables. namely. Sample Selection Sampling was done in two stages. while selecting sample of companies from the selected 7 industries. viz.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.

and PL = Lowest market price during the same period. Earning Per Share (EPS) EPS = Net profit after tax – Preference dividend No. Cover (C) It shows the extent to which the dividend per share is protected by the earnings of the company. 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 company’s stock. Book Value (BV) BV = Paid up capital+ Shareholders reserves Intangible assets-Preference dividend in arrears No. P = PH + PL 2 Where PH = Highest market price during the period. Of Equity Shares Subscribed Dividend per Share (DPS) Dividend is the portion of the profit after taxes. 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. It has a significant influence on the market price of share. Yield (Y) Y = DPS Market price per share . which is distributed to the shareholders for their investment and bearing risk in the company.Market Price (P) Because of changes in the buying and selling pressures. C = EPS DPS The reciprocal of the cover is known as dividend pay out ratio.

Correlation The analysis of the degree of linear association between various variables used was carried out with the help of Karl Pearson’s correlation method. The general form of multiple Linear Equation is: Y = b0 + b1X1+ b2X2+ ………+ bnXn . The lower the value of ‘r’ the lower is the degree of linear relationship between the 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. the following relationship of independents variable with dependent variable is formed P = f (BV.Growth (G) G = St – St-1 St-1 Where St = Net sales in the current year. 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. Tools and Techniques used To achieve the objectives of the present study. we have employed the following statistical techniques. The significance of the correlation coefficient is tested with the help of t-test distribution at 1 and 5 per cent level of significance. and St-1 = Net sales in the previous year. Mean Values Mean values of the dependent and independent variables have been calculated. C. P/E. Regression A linear multiple regression models has been selected to measure the combined effects of independent variables on the dependent variables. for studying the impact of explanatory variables as dependent variables. EPS. DPS. Y) While. 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. G.

X2.47 17.3 in2003 to . and b1. The coefficient of determination R was computed to determine the percentage variation in the dependent variables. b2…bn = regression coefficients of independent variables.96 103.9 55.03 6.78 7.07 126.7 7. The statistical significance of regression coefficients was worked out and tested by 2 applying‘t’ test.3 6. with a view to account for the loss of degree of freedom resulting from the -2 2 inclusion of additional explanatory variables.3 33. 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.18 7.96 5.2 P/E 6.98 127. X1.40 5.99 6.33 Table -I Mean value of market price (P) and EPS showed a positive correlation in almost all the year .87 5. b0 = regression constant.41 14.21 38.98 6.09 EPS 16.2 8.P/E ratio fluctuates very widely for the selected period ranging from 5.02 37.Where Y = dependent variable. Also. 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 103.6 14. X3 = independent variables.

96 . 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. . .30 .153 Standard Deviation: It measures the absolute variability of a distribution from their means.03 0. .07 .21 -0.09 . A small standard deviation means high degree of uniformity of the observation as well as homogeneity of a series and vice versa. 38. 103. Total 3. 55. . .015 0.6 in 2006 while the higher yield was depicted in the initial years of the study whereas it declined after that. .98073 Correlation: Correlation for seven electronic companies over the period under study is given in table III. 37.17.98 .35231 4.157 -0. The correlation is drawn between independent variables (EPS.02 .0043 -0. COMPANY NAME LG SONY PHILIPS VIDEOCON PANASONIC WHIRLPOOL SAMSUNG GROWTH RATE 0.21 . . P/E Ratio) and dependent variable (MP) . 103. Deviation P EPSPERATIPO 33. 127. .90 .23 -0. 126.

293 . (2.843 -.009 . Error R Square of the Estimate 1 . (2.994 .987 .117 Correlatio n Sig.009 tailed) N 8 8 8 EPS Pearson .117 1 O Correlatio n Sig. tailed) N 8 8 8 ** Correlation is significant at the 0.7% variation is explained by all the independent variables. P The coefficient of determination has shown 98.426 1 -.782 tailed) N 8 8 8 PERATIP Pearson .293 . EPS. 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.982 .01 level (2-tailed). Adjusted R square only 98. and P/E ratio. The results are exhibited in table IV Table IV Model Summary Model R R Square Adjusted Std. P Regression Analysis: Multiple Linear regression equation results are drawn from independent and dependent for selected industries. .843 Correlatio n Sig. The analysis shows the positive association of market price.66112 a Predictors: (Constant). . (2. Conclusion: It is observed from the tables that from the year 2001 to 2008 the mean value of market price has grown considerably.Table III Correlations P EPSPERATIPO Pearson 1 .782 . EPS.426 .2% in share price. .

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

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