Determinants On Share Prices In The Nigerian Stock Market

Project and Seminar Material for Accountancy / Accounting

Abstract

This study was carried out to identify the factors that influence share prices for the selected sectors at NSE. Panel data for the period June 2008 to December 2012 was gathered on the seven variables (SP as the dependent variable and IR, FOREX , ET, NSI, NASI and lagged SP as the independent variables). The results indicate that the selected independent variables cannot be exclusively used as determinants of share price as they have negligible impact. This was been observed in all the regression results of the selected firms and denoted an inefficient market in terms of relative information that is available. Equity Bank share prices were dependent on IR, FOREX, NASI and lagged SP. This could be explained by the fact that the share prices had a large differential and therefore could adapt more easily to the variables under study. Mumias Sugar and Sameer share prices were found to be dependent on NASI while the share prices of KQ, KenGen and Nigeria Re were found not to be related / predicted by any of the assumed variables. From the above results, NASI seemed to have a slightly larger significance in determination of share prices which could have been influenced by the fact that it incorporates all companies quoted at NSE. The other variables have neglible effect on share prices with the exception of Equity bank where IR, FOREX and lagged SP were also found to be significant determinants of share price.

Chapter One

Introduction

1.1 Background to the Study

In the wake of the financial scandals and economic disintegration witnessed in Nigeria where billions of naira worth of investment and retirement wealth has been lost (Oyerinde, 2009), the very integrity and survivability of the capital market has been called to question. The capital market experienced a turbulent time in 2008 which led to downward trend in the movement of share prices. This downward trend as noted by Jeroh and Okoro (2015), is attributed to severalforces or dynamisms that have the tendency to determine the prices of share in the capital market. In line with the above view, Tan and Lim (2007) opined that share prices in the capital market are either influenced by accounting or non-accounting dynamics. Accounting dynamics refers to those statistics, facts, figures (often called ‘accounting numbers’) reported in the statement of comprehensive income, statement of financial position and cash flows of firms such as earnings per share, dividend per share, price earnings ratio, dividend yield, book value per share, return on equity, market value per share, net assets per share, dividend cover, profitability, and so on

Non-accounting dynamics are those numbers not reported in financial statements of firms. These may include exchange rates, inflation rates, interest rates, political instability, speculation, forced sales, gambling, rumour, forces of demand and supply, and so on. Glezakos, Mylonakis and Kafouros (2012) believed that investors in the capital market make use of these dynamics in choosing which firm they will invest or not. Murinde (2006) posits that investors rely on accounting and non-accounting statistics while trading long-term financial securities (such as ordinary shares, debentures, unsecured loan stock and convertible bonds), government bonds and other public sector securities such as treasury bills and gilt-edged stocks. Thus, these dynamics (accounting and non-accounting information) are good enough in determining share prices of companies.

Germon and Meek (2001) state that those who have funds to invest or lend may decide where to place their resources based on the information they get. Generally, investors usually depend on financial reports prepared by the management of such organizations. The financial report is one of the best sources of accounting information about a firm listed on the floor of the stock exchange. The primary purpose of financial statements is to provide information concerning the financial position of the company, its operational results, and any changes of control in the company cash flow. Inspite of the pivotal role accounting information plays, there are still certain dynamisms (such as inflation, interest, exchange rates, government policies etc) that may downturn or upturn the prices of share (Terfa, 2010).

In developed countries, studies have shown that accounting and non-accounting information have the tendency to determine share prices of companies (Collins, Maydew & Weiss, 1997; Hamid & Sumit, 1998; Beaver, 2002; TErfa, 2010). Studies on share price determinants are aggravated by the fact that investors use both accounting and non-accounting information in choosing which firm they will invest or not. Thus, the researcher intend to investigate whether or not these dynamics (accounting and non-accounting information) affect share prices of publicly quoted companies in Nigeria. This is in a bid to corroborate or repudiate existing empirical works on share price determinants.

1.2 Statement of the Problem

The factors that determine share prices remains an issue of concern in the capital market, especially in developing capital markets (Jeroh & Okoro, 2015). Negah (2008) asserts that studies on share price determinants in developing capital markets are limited. He further claims that the scanty literature replicates works done in developed markets and that a closer examination of these works reveals that they face both epistemological and empirical challenges. According to Sutton (1997), while investors make use of accounting information in some investment decision, non-accounting information still have a central place in share price determination. Investors that masks or fails to consider non-accounting information may put itself at risk (Olgunde, et.al, 2006).

Empirical evidence suggests that non-accounting information (such as inflation, exchange, interest rates, political instability, government policies and so on) are the most significant variables that affects share prices (Udegbunam & Eriki, 2001; Ologunde, et.al, 2006; Terfa, 2010; & Malaolu, Ogbuabor & Orji, 2013). On the contrary, some studies suggest that accounting information (such as Earnings Per Share, Book Value Per Share, Dividends Per Share, Net Assets Per Share, Dividend Cover, Return On Equity, Earnings Yield and so on) are the major variables with the most significant effect on share prices in the capital market (Pirie & Smith, 2003; Mondal & Imran, 2010; Malik, Qureshi & Azeem 2012; and Ejuvbekpokpo & Edesiri, 2014). These contradictory views have led to the inconclusive nature of various studies on the factor that determine share prices in the capital.

Most studies that evaluated factors that determine share prices considered either accounting information without considering non-accounting. The question is, are there no other variables apart from accounting variables that may have the tendency to affect share prices in the capital market? Given the above, it is pertinent to carry out a detailed evaluation of the accounting and non-accounting variables that affects share prices in emerging capital market while considering the combined effect of these variables on share prices. Also, it is germane to assess the differences in the perception of institutional and individual investors on the factors that affect share prices of companies. In the light of the above, the problem identified as at the time of this study are that there is no consensus on the combined effect of accounting and non-accounting dynamics on share prices in Nigeria. This forms the main thrust of this proposal.

1.3 Objectives of the Study

The main objective of this study is to examine the factors that determine share prices of companies listed on the Nigerian Stock Exchange. The intended specific objectives are: To:

Identify the major accounting variables that have significant effect on share prices of companies.
Ascertain the non-accounting variables that affect share prices of companies.
Determine the relationship between the major accounting variables and share prices of companies.
Examine the association between the non-accounting variables and share prices of companies.
Investigate the combined effect of the accounting and non-accounting variables on share prices of companies.
Assess the differences in perception of institutional and individual investors on the factors that affect share prices of companies.

1.4 Research Questions

Arising from the foregoing objectives, the study will be guided by the following research questions.

What are the major accounting variables that have significant effect on share prices of companies?
What are the non-accounting variables that affect share prices of companies?
To what extent is there a relationship between the major accounting variables and share prices of companies?
To what extent is there association between the non-accounting variables and share prices of companies?
What is the combined effect of the accounting and non-accounting variables on share prices of companies?
Are there significant differences in perception of institutional and individual investors about the factors that affect share prices of companies?

1.5 Research Hypotheses

The following are the intended research hypotheses, which are formulated in line with the objective of the study:

Hypothesis I

Ho: There is no significant relationship between accounting variables and share prices of companies
Hi: There is significant relationship between accounting variables and share prices of companies

Hypothesis II

Ho: Share prices of companies are not significantly influenced by non-accounting variables.
Hi: Share prices of companies are significantly influenced by non-accounting variables.

Hypothesis III

Ho: Accounting and non-accounting variables do not have combined effect on share prices of companies
Hi: Accounting and non-accounting variables have combined effect on share prices of companies

Hypothesis IV

Ho: There are no significant differences in perception of institutional and individual investors about the factors that affect share prices of companies.
Hi: There are significant differences in perception of institutional and individual investors about the factors that affect share prices of companies.

1.6 Scope of the Study

This study intends to empirically examine the factors (i.e. accounting and non-accounting variables) that determine share prices of companies. Thus, the study will be limited to the Nigerian Capital Market and the study period is from 2005 – 2014 (i.e. a period of 10years). The period under investigation is based on the fact that this period experienced improvement in financial reporting across the globe and high demands for quality financial statements in the capital market.

1.7 Significance of the Study

There is little known about the role of accounting and non-accounting information in terms of its ability to explain movements in the prices of shares of listed companies in Nigeria and the world over.Almost all evidence in this area are obtained from United States of America (USA) or Western European countries which have sophisticated markets compared to most developing countries like Nigeria. Investors from all over the world may eagerly aspire to do business in Nigeria if the information obtained meets the needs of both small and institutional investors. This is because information obtained from the market is pivotal in making informed investment decisions. Thus, the findings generated in this study will be used to identify the major variables that affect share price movements on the Nigerian Stock Exchange. This study will provide a guide as to which accounting and non-accounting variables is or is not valued by investors.

The work is important to the Financial Reporting Council as it acts as a feedback channel to the council on which accounting variables (earnings, book value, dividend and dividend cover) is most widely used for equity valuation in Nigeria. The findings generated in this study may be used to test the existing theories under extreme conditions not present in developed economies where most of the prior studies were carried out as well as enabling the national standards setters to know the nature of demand placed on accounting and non-accounting information by their local investment community, stakeholders and public. Finally, this study fills the gap in literature by investigating the variables that determines share prices in the Nigerian capital market. The results provide useful evidence to other emerging stock markets.

Chapter Five

Summary, Conclusion and Recommendations

5.1 Introduction

5.2 Summary

The results indicate that the selected independent variables cannot be exclusively used as determinants of share price as they have negligible impact. This was been observed in all the regression results of the selected firms and denoted an inefficient market in terms of relative information that is available.

Equity Bank share prices were dependent on IR, FOREX, NASI and lagged SP. This could be explained by the fact that the share prices had a large differential and therefore could adapt more easily to the variables under study. Mumias Sugar and Sameer share prices were found to be dependent on NASI while the share prices of KQ, KenGen and Nigeria Re were found not to be related / predicted by any of the assumed variables.

From the above results, NASI seemed to have a slightly larger significance in determination of share prices which could have been influenced by the fact that it incorporates all companies quoted at NSE. The other variables have neglible effect on share prices with the exception of Equity bank where IR, FOREX and lagged SP were also found to be significant determinants of share price.

5.3 Conclusion

The results of the empirical analysis are consistent with most of the findings in the literature review and support the evidence that the selected determinants have little effect on share price. The study revealed that the selected variables are independent series although there was indication of some causality relationship from some of the variables such as interest rate, FOREX, NASI and lagged share price. Share prices are influenced by numerous factors so that predictions using only a number of select variables may give incorrect results. Many researchers have striven hard to build models which incorporate a diverse array of variables to predict the share prices but have not been successful in having one such model.

5.4 Recommendations

The low R-Square values of 5.6 percent to 0.2 percent indicated other unexplored factors that might influence SP. This research centred on seven firms for a five year period. Stock markets are very complex hence finding a pattern in share price is quite difficult when using limited data and time period. Due to the seasonality and cyclic nature of stock markets the time period selected may have affected the final results. The selection of variables could also be of concern, for example there are many IR in use (such as inter-bank interest rates, commercial banks interest rates) and selection of one that does not have any bearing on the share price may affect the results.

Possible further research recommended in line with the present study are:

The present research can be extended to cover longer time periods, more firms and more macroeconomic variables.
This study focussed on the linear relationships and could be extended to include nonlinear relationships between the variables. Also, other multivariate statistical forecasting models could be employed to verify the results.

5.5 Limitations

The main limitation of the study was the number of firms selected (seven) for analysis, the time period (five years) and limited variables. The daily data for the firms and variables was numerous and from multiple sources hence the need to limit the variables and firms . Also given the varied results of the regressions the variables selected could be limitations in themselves.