Corporate Performance And Share Price Of Listed Food And Beverages Firms In Nigeria
Corporate Performance And Share Price Of Listed Food And Beverages Firms In Nigeria
Abstract
The aim of this study was to examine the relationship between corporate performance and share price of listed food and beverages firms in Nigeria. The study used a descriptive research design and targeted a population of 67 firms listed food and beverages firms in Nigeria. The study used only secondary data, which covered a period of 5 years from 2011 to 2015. The study employed Ordinary Least Square (OLS) Regression method to estimate the market model parameters (to be used in determining residual effect). The study also adopted multivariate correlation analysis to establish the correlation between financial performance and stock return. The correlation results found a significant positive correlation between financial performance, share price levels and stock returns but found an insignificant positive correlation between dividend payout ratio and stock returns of the listed food and beverages firms in Nigeria. The results of the regression coefficients found an insignificant positive relationship between financial performance, share price levels and dividend payout (DPR) and stock returns of listed food and beverages firms in Nigeria. The study concluded that there is a direct relationship between financial performance and stock returns hence an increase in financial performance of the listed firms increases stock returns of firms listed at the NSE. The study also concluded that shares prices and dividend payout has a direct impact on stock returns hence an increase in shares prices and dividend payout increases stock returns of listed firms. The study recommends that the management of firms listed at the NSE should strive to improve the financial performance and develop an optimal dividend payout policy, which maximizes the returns of their firms.
Table of Content
- Title Page
- Certification
- Dedication
- Acknowledgement
- Table of Content
- List of Tables
- Abstract
Chapter One:
Introduction
- 1.1 Background of the Study
- 1.2 Statement of the Problem
- 1.3 Objective of the Study
- 1.4 Research Questions
- 1.5 Research Hypothesis
- 1.6 Significance of the Study
- 1.7 Scope of the Study
- 1.8 Limitation of the Study
- 1.9 Definition of Terms
- 1.10 Organisations of the Study
Chapter Two:
Review of Literature
- 2.1 Conceptual Framework
- 2.2 Theoretical Framework
- 2.3 Empirical Review
Chapter Three:
Research Methodology
- 3.1 Introduction
- 3.2 Research Design
- 3.3 Target Population
- 3.4 Data Collection Procedures
- 3.5 Data Analysis
- 3.5.1 Analytical Model
- 3.5.2 Test of Significance
Chapter Four:
Data Presentation and Analysis
- 4.1 Introduction
- 4.2 Response Rate
- 4.3 Descriptive Statistics
- 4.4 Correlation Analysis
- 4.5 Regression Analysis
- 4.6 Interpretation of the Findings
Chapter Five:
Summary, Conclusion and Recommendation
- 5.1 Introduction
- 5.2 Summary
- 5.3 Conclusion
- 5.4 Recommendation of the Study
- 5.5 Suggestion for Further Research
- REFERENCES
Chapter One
Introduction
1.1 Background of the Study
Corporate organizations exist for the sole reason of creating value to stakeholders, especially shareholders. For this reason, firms that are able to create value are rewarded by the market through generation of greater revenue, which translates to profit and operating cash flow that finally accrues to shareholder (Stewart, 2004). For this to materialize, firms must be able to operate at an acceptable level of sales, profits and return.
In financial economics, the relation between revenue growth and shares price volatility has been the subject of extensive research in recent years. Its roots are generally credited to the work of Osborne (1959) who – in his seminal work – modeled price changes according to a diffusion process that had a variance dependent on the quantity of transactions of that particular issue. With this, he began a long line of work that considered the possible relationship between returns volatility and firm’s operation performance. Other scholars such as Pandey (2005) have argued that enhancing shareholders’ wealth and profit making are among the major objectives of a firm. According to Azhagaiah and Priya (2008) shareholder’s wealth is mainly influenced by growth in revenue, improvement in profit margin, capital investment decisions and capital structure decisions.
Theoretically, it is reasonable to expect good financial performance as reflected by revenue growth and profitability to affect equity securities market pricing and yields (premium returns). This is because shareholder wealth is maximized through the enhancement of the share prices of the companies targeted by the investors. As its know, sales revenue is the measure of the external value created by the firm as a result of satisfying customers need, firms that are able to exceed customers expectation tends to generate favorable sales returns which affects profitability. Therefore, profitability is a function of sales and denotes the internal value, which subsequently transmits positive information in the market that and thus yields positive external returns (Opiyo et al, 2014).
Pandey (2005) argued that profit making is among the major objectives of a firm. Thus shareholder’s wealth is mainly influenced by growth in sales, improvement in profit margin, capital investment decisions and capital structure decisions according to Azhagaiah and Priya (2008). The valuation consequences of revenue surprises suggest that revenue growth provides incremental information about future earnings growth. Specifically, firms that experience strong earnings growth and strong revenue growth concurrently may exhibit faster earnings growth in the future than firms that exhibit similar levels of earnings growth but with no surprises or negative surprises on the revenue front.
The price of a share is the present value of cash flows that accrue to its owner. This simple yet fundamental principle of finance indicates that what matters for stock valuation is bottom line earnings that eventually result in cash payouts, either in the form of dividends or share repurchases. Cash flows from operations provide a key metric in assessing a firm’s ability to generate cash from internal operations and remain viable.
Shares price are used to measure the performance of a company stock. The financial objective of the firm is maximizing investment returns, which are reflected by the change in the company stock prices. Financial performance of a company is measured using shares price.
According to Ross et al (2010) return of stock traded in the financial markets is composed of two parts; The normal or expected returns which is dependent on the information that the shareholders have that bears on the stock and is based on the market understanding of the important factors that will influence the stock in the coming year and the return that is uncertain and risky. This risky portion comes from unexpected information revealed within the year among them being profit warning announcement.
Pinto, Henry, Robinson and Stowe (2013) defines holding period return as the return earned from investing in an asset for a specified time period. The specified time period is the holding period under consideration whether it is one day, a year, a month or any other length of time. The shares price includes change in the value of a stock (capital gain yield) and cash dividend paid during the period.
Studies have explored links between firm characteristics and shares price. The capital asset pricing model of Sharpe (1964) explain shares price as a function of stocks systematic risk using the beta coefficient. However, over the year the capital asset pricing model has come under criticism for failing to explain shares price. Some firm characteristics have been shown to have a strong ability to explain and forecast shares price. Fama and French (1992) Size and Market-to-Book have been found to be important measures in explaining cross sectional shares price. Banz (1981) provide empirical evidence to show that on average, small-size firms yield higher shares price than large-size firms.
According to data obtained from NSE website there are approximately 62 active listed companies (www.nse.co.ke) trading over US $5 million with market capitalization of approximately US $15billion and trading in government bonds averaging US$ 60 Million on a daily basis (Kiminda, Githinji & Riro, 2014). This makes NSE one of the vibrant bourses in Africa. Most if the firms listed at NSE have considerably shown growth in financial performance with an unequal performance in stock market. For instance, Safaricom Limited is one of the leading integrated communications companies in Africa with over 17 million subscribers (CAK, 2015). Since it become a public company with limited liability on 16 May 2002 (www.safaricom.co.ke), Safaricom have consistently declared comparatively huge accounting profits over the past decade yet it’s share price performance have not reflected that. In addition, other firms especially from financial institutions (banks) have continuously report consisted upward growth rate in operating profit that inconsistence with their share performance. This puzzle enticed the study.
1.2 Statement of the Problem
The relationship between revenue growth and shares price has been a puzzle in the corporate and academic discussion. Although revenue has consistently exhibited direct and significant effects on shares price (Boesso & Kumar, 2007; Robinson and Stowe, 2013; Opiyo et al, 2014). Studies from developed markets have shown or argued that this could be dependent on the size of overheads the firm absorbed in form of administrative expenses resulting to either growth or decline in revenue thus yielding positive or negative returns (Azhagaiah & Priya, 2008).
In Nigeria, however, firms listed at Nigeria stock Exchange have consistently declared comparatively huge accounting profits over the past decade. For instance, Globalcom Ltd has posted the largest corporate profits in the Nigeria over the past five years making it one of the top performing companies in the region. Puzzlingly, however, it is among the low dividend payout firms.
In addition, Opiyo et al (2014) reported that despite NSE being one of the vibrant bourses in the region, its pricing mechanism does not reflect firms operating financial performance. This therefore provides a contradictory view to mainstream theory of return and security pricing, an area that is still blurred in academic field. Therefore, this has prompted the researcher to investigate what relationship exists between revenue growth and shares price. Specifically, the study will establish how the Corporate Performance And Share Price Of Listed Food And Beverages Firms In Nigeria.
1.3 Objective of the Study
The main objective of the study is to examine the Corporate Performance And Share Price Of Listed Food And Beverages Firms In Nigeria.
Specifically, the study aims to
- To examine the relationship between financial performance and share prices for the Listed Food And Beverages Firms In Nigeria.
- To examine the relationship between corporate performance and stock returns for Listed Food And Beverages Firms In Nigeria.
1.4 Research Question
- What is the relationship between financial performance and share prices for the Listed Food And Beverages Firms In Nigeria?
- What is the relationship between corporate performance and stock returns for Listed Food And Beverages Firms In Nigeria?
1.5 Hypothesis of the Study
The following hypothesis was formulated and tested for the study;
- Ho: There is no significant relationship between financial performance and share prices for the Listed Food And Beverages Firms In Nigeria
- Hi: There is significant relationship between financial performance and share prices for the Listed Food And Beverages Firms In Nigeria
1.6 Significance of the Study
The study intends to establish a combined effect of revenue growth, profitability and dividend yield on stock return of firms listed at NSE. Specifically, the study is to be of policy and practical importance to a variety of stakeholders including and not limited to:
Investors
To investors or shareholders, the findings of the study would help them assess the appropriateness of the market pricing of the accounting returns by the NSE. It would help them to shape their investment strategies based on financial performance and corporate profits.
Management
To management of firms listed at the NSE, the study findings would help them to appraise the acceptability of the pricing of the securities at the NSE. This would enable them to craft strategies that would boost market share performance.
Regulators and Policy Makers
To market regulators particularly the Capital Markets Authority (CMA), the findings of the study would help them assess the relationship between corporate financial performance and equity securities market performance. This can help them to develop and institute measures to enhance operational and informational efficiency in the Nigeria capital markets particularly of the NSE.
Scholars
To academicians and other scholars the study will provide literature for further analysis into the area of research.
1.7 Scope of the Study
The study will analyze the examine the Corporate Performance And Share Price Of Listed Food And Beverages Firms In Nigeria. The study is limited to some selected Food And Beverages Firms In Nigeria.
1.8 Limitation of the Study
In the course of carrying out this study, the researcher experienced some constraints, which included time constraints, financial constraints, language barriers, and the attitude of the respondents. However, the researcher were able to manage these just to ensure the success of this study.
1.9 Definition of Terms
Earnings Per Share:
Earnings per share is the monetary value of earnings per outstanding share of common stock for a company. It is a key measure of corporate profitability and is commonly used to price stocks.
Gross Domestic Product:
Gross domestic product is a monetary measure of the market value of all the final goods and services produced and sold in a specific time period by a country or countries, generally “without double counting the intermediate goods and services used up to produce them”.
Net Present Value:
The net present value or net present worth applies to a series of cash flows occurring at different times. The present value of a cash flow depends on the interval of time between now and the cash flow. It also depends on the discount rate. NPV accounts for the time value of money.
1.10 Organization of the Study
This research work is organized in five chapters, for easy understanding, as follows.
- Chapter one is concern with the introduction, which consist of the (overview, of the study), historical background, statement of problem, objectives of the study, research hypotheses, significance of the study, scope and limitation of the study, definition of terms and historical background of the study.
- Chapter two highlights the theoretical framework on which the study is based, thus the review of related literature.
- Chapter three deals on the research design and methodology adopted in the study.
- Chapter four concentrate on the data collection and analysis and presentation of finding.
- Chapter five gives summary, conclusion, and recommendations made of the study.
Chapter Five
Summary, Conclusion and Recommendations
5.1 Introduction
This chapter provides the summary of the research, the conclusion and recommendations of the research, limitation of the research and suggestion for additional research.
5.2 Summary
The objective of this study was to establish the relationship between corporate performance and share price of listed food and beverages firms in Nigeria. The study reviewed the revenue and investment catering theory, capital asset pricing theory and the efficient market hypothesis to explore the relationship between financial performances of listed firms. The independent variable was financial performance and stock returns were the dependent variable and share price levels and dividend payout were used as control variables. The study carried a census of the 67 firms listed at the Securities Exchange market however; data was only obtained from 57 firms hence a response rate of 85%, which was considered adequate for the study.
The summary descriptive statistics found that the mean stock return for the listed firms was 0.35469 whereas the mean financial performance (ROA) was 0.05651 while the mean share price level was 78.78. The mean dividend payout ratio was 24.98. The correlation results found a significant positive correlation between financial performance, share price levels and stock returns but found an insignificant positive correlation between dividend payout ratio and stock returns of the listed firms.
The findings also established that the R square value was 0.028, which showed that the research variables (financial performance, share price levels and dividend payout) explain 2.8% of variation in stock returns of listed firms. The ANOVA results found a significant relationship between financial performance and stock returns. The results of the regression coefficients found an insignificant positive relationship between financial performance, share price levels and dividend payout (DPR) and stock returns of firms listed at the NSE.
5.3 Conclusion
The study found a positive relationship between financial performance, share price levels dividend payout and stock returns but the relationship was insignificant. However, this study concludes that there is a direct relationship between financial performance and stock returns hence an increase in financial performance of the listed firms increases stock returns of firms listed at the NSE. The study also concludes that shares prices and dividend payout has a direct impact on stock returns hence an increase in shares prices and dividend payout increases stock returns of listed firms.
5.4 Recommendation of the Study
The study recommends that the management of firms listed at the NSE should strive to improve the financial performance of their firms to enhance their firms’ stock returns. This is because enhancing stock returns goes in line with the objective of maximizing shareholders wealth.
The study also recommends that organizations that develop policies on stock trading and stock market operations should come up with policies on share prices to ensure that listed firms enhance the returns on their stock.
The study also recommends that the management of listed firms should develop an optimal dividend payout policy, which maximizes the returns of their firms since the study established that dividend payout influences stock returns.
5.5 Suggestion for Further Research
The study investigated the the relationship between financial performance and stock returns for firms listed at the Nigeria Securities Exchange. However, the study has established the hypothesized variables only influence 3% of the variation on stock performance. The study recommends an additional study on the other determinants the affect stock returns of listed firms. The study also recommend an additional research using a longer time period of 10 years and may use other models like granger causality to test where there is a causal relationship between financial performance and stock returns.
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