DETERMINATS OF SHARE PRICE WITH REFERENCE TO BSE “GROUP A”

SHARES

Abstract:

Investment in equity shares is one of the major avenues of investment that yields considerable
returns to investors. It is also a source of finance for the capital requirements of firms. Returns
from such equity investments are subject to vary owing to the movement of share prices, which
depend on various factors. Share price determination is always a topic for discussion. Analysts
and investors hold different perspectives about the variables that affect the share price
determination. It is a tough task to clearly predict the exact variables which have a great impact
on share price. The study takes into account 69 companies from 7 industries of group A shares of
BSE which have a higher weight on the index for a period of 7 years from2006-2013. It is
observed that Sales, DPS and Return on net worth as determinants of share prices.

Keywords: DPS, EPS, DP, Book Value, P E ratio, networth, net profit, Dividend Yield, RONW

1. INTRODUCTION

The determinants of stock prices are often a matter of debate. Economists and financial market
participants hold different views as far as the pricing of an asset is concerned. In an efficient market,
stock prices would be determined primarily by fundamental factors such as earning per share, dividend
per share, payout ratio, size of the firm and dividend yield, management, diversification, etc. To
forecast future stock prices, fundamental analysts use stock valuation ratios to derive a stock's current
fair value and forecast future value. If fair value is not equal to the current stock price, fundamental
analysts believe that the stock is either over or under valued and the market price will ultimately
gravitate towards fair value. Fundamentalists do not heed the advice of the random walkers and believe
that markets are weak form efficient. By believing that prices do not accurately reflect all available
information, fundamental analysts look to capitalize on perceived price discrepancies.

Investment in equity has an advantage of liquidity as well as profitability. Normally equity investment
attracts dividend and capital appreciation. The capital appreciation in turn is the result of higher market
price. Before investing into equity, an investor is interested to analyse the investment decision either
by way of fundamental approach (or) technical approach. The fundamental approach is based on
certain parameters with respect to economy, industry and company. The variables to be included in the
economy and industry have same reflections irrespective of the company to be taken into account. But
at the same time the companies operating under the economy and industry differ from each other as
well as unique in its operation. Hence the investors will give more weightage to company analysis
before investing in the equity. The company analysis is based on certain accounting variables and
those accounting variables have an influence on market price. Since many numbers of variables are
available for evaluation of company performance, the study has restricted to certain investors’
variables to find the impact of the variables on market price.

MARKET PRICE (P):

The market price of the share is mainly determined by the forces of demand and supply of a particular
security in the market. The market price reflects the collective wisdom and knowledge of the market.
In the present study, average of 12 months closing price has been taken

DIVIDEND PER SHARE (DPS)

Dividends per share (DPS) is an accounting ratio used to evaluate the total number of dividends
declared for each share of issued stock. The issued stock taken into account is common stock.
Declared dividends are the portion of the company’s profit that is to be paid to the shareholder.
However, declared dividends are not the equivalent of paid dividends.

EARNING PER SHARE (EPS):

Earnings per share, also called net income per share, is a market prospect ratio that measures the
amount of net income earned per share of stock outstanding. In other words, this is the amount of
money each share of stock would receive if all of the profits were distributed to the outstanding
shares at the end of the year.

DIVIDEND PAYOUT RATIO:

The dividend payout ratio is the amount of dividends paid to stockholders relative to the amount
of total net income of a company. The amount that is not paid out in dividends to stockholders is
held by the company for growth. The amount that is kept by the company is called retained
earnings.
BOOK VALUE

Book value refers to a company's total assets minus intangible assets and liabilities such as debt.

A company’s book value might be higher or lower than its market value. Book value refers to the
total amount a company would be worth if it liquidated its assets and paid back all its
liabilities. Book value can also represent the value of a particular asset on the company's balance
sheet after taking accumulated depreciation into account.

PRICE EARNINGS RATIO

The PE ratio is probably the most common measure to help investors compare how cheap or
expensive a firm’s shares are, as stock prices, for lack of a better term, are arbitrary. The trailing
PE is just the price per share of the stock divided by the annual net diluted earnings per share the
firm generated in its last fiscal year. The forward PE is the price per share of the stock divided by
next fiscal year’s annual net diluted earnings per share of the firm. It’s only when investors
compare a firm’s share price to its annual net diluted earnings per share that they can get a sense
for whether a company’s shares are expensive (overvalued, overpriced) or cheap (undervalued,
underpriced). The higher the PE, the more expensive the company’s stock--all else equal.

NETWORTH:

The amount by which assets exceed liabilities. Net worth is a concept applicable to individuals
and businesses as a key measure of how much an entity is worth. A consistent increase in net
worth indicates good financial health; conversely, net worth may be depleted by annual operating
losses or a substantial decrease in asset values relative to liabilities. In the business context, net
worth is also known as book value
A high net worth relates to good financial strength and ultimately good credit rating of an
individual or a company. Similarly a low or negative net worth will relate to a weaker financial
strength and a lower credit rating, thus directly affecting the individual's or the company's ability
to raise funds from the market. Net worth is the difference between the asset and the liability of
an individual or a company.
NET PROFIT:

Net profit, also referred to as the bottom line, net income, or net earnings is a measure of the
profitability of a venture after accounting for all costs. In accounting, net profit is equal to
the gross profit minus overheads minus interest payable for a given time period. The net profit
margin percentage is a related ratio. This figure is calculated by dividing net profit by revenue or
turnover, and it represents profitability, as a percentage.

DIVIDEND YIELD:

The dividend yield or dividend-price ratio of a share is the dividend per share, divided by the

price per share. It is also a company's total annual dividend payments divided by its market
capitalization, assuming the number of shares is constant. It is often expressed as a percentage.
Dividend yield is used to calculate the earnings on investment (shares) considering only the
returns in the form of total dividends declared by the company during the year.

RETURN ON NETWORTH

Return on Net Worth (RONW) is used in finance as a measure of a company’s profitability It

reveals how much profit a company generates with the money that the equity shareholders have
invested Therefore, it is also called ‘Return on Equity’ (ROE) This ratio is useful for comparing
the profitability of a company to that of other firms in the same industry. The amount of net
income returned as a percentage of shareholders equity. Return on equity measures a
corporation's profitability by revealing how much profit a company generates with the money
shareholders have invested.

1.2 LITERATURE REVIEW

Srivastava (1984) examined cross- section study of 327 companies and concluded that high
dividend rates are associated with higher market prices of securities in India.

Balkrishan (1984) in his work analyzed the interrelationship in the explanatory variables, i.e.
dividend per share, earning per share, book value, yield and cover with market price of share. A
linear regression model was used to study the inter-relationship of these variables in general
engineering and cotton textile industries.
For the chemical industry, Chawla & Srinivasan (1987) examined the relation between share
prices, dividend and retained earnings. Both dividend and retained earnings were found to be
significant determinants of share price.

Karathanassis & Philippas (1988) for banks listed on Athens stock exchange found dividends,
retained earnings and size to exert a significant positive influence on share prices.

Zahir M A (1992) report dividend, earnings and yield as factors influencing prices of both more
volatile and less volatile shares. Further, the study point out that security price index is a
significant price determinant of more volatile shares.

Uddin (2009) analysed the effect of certain microeconomic factors on the share prices of bank,
leasing and insurance companies listed on Dhaka Stock Exchange.The study found dividend,
earnings and net asset value per share to bear a significant relation with share prices.

Mohanty (1991) found that once the PE risk and the liquidity risk was adjusted for, the book-to-
marketand size of the company does not had explanatory power in so far as stock return are
concerned

Sen and Ray (2003) examined the key determinants of stock price in India. The study is based
upon the stocks compromising the BSE index over a period 1988-2000. The empirical study
revealed dividend payout was an important factor affecting stock prices. Further, they found
earning per share has a very weak impact on the share prices. The study explored one of the
crucial factor dividend payout ratios having impact on Indian stock price.

Sharma and Singh (2006) used data from 160 Indian firms between 2001 and 2005 and found
that earnings per share, price-earnings ratio, dividend per share, dividend coverage, dividend
payout, book value per share, and firm size are the determinants of share prices.

By examining share prices of the firms listed on the Bombay Stock Exchange, Mehta& Turan
(2005) identified market capitalisation, market price to book value ratio and price-earning ratio
as major factors influencing share prices.

Mishra (2004) by using monthly data for the period 1992 to 2002, examined the relationship
between stock market and foreign exchange markets using Granger causality test and Vector
Auto Regression technique study suggested that there is no Granger causality between the
exchange rate return and stock return.

Bhattacharya (2002) investigates the nature of the causal relationship between stock prices and
macroeconomic aggregates in the foreign sector in India.

Nirmala and Sanju (2011) identified the determinants of share prices in the Indian stock market.
The study focuses on three sectors viz., auto, health care & public sector undertakings over the
period 2000-2009. They employed panel co -integration test and fully modified least squares to
examine the effect of dividend, profitability, price earnings ratio and leverage on share prices.
The empirical findings showed that dividend per share and price earnings ratio are influenced
positively to share price of all three sectors.

STUDY UNIT

About BSE:

Established in 1875, BSE (formerly known as Bombay Stock Exchange Ltd.), is Asia's first &
fastest Stock Exchange with the speed of 200 micro seconds and one of India's leading exchange
groups. Over the past 140 years, BSE has facilitated the growth of the Indian corporate sector by
providing it an efficient capital-raising platform. Popularly known as BSE, the bourse was
established as "The Native Share & Stock Brokers' Association" in 1875. BSE is a corporatized
and demutualised entity, with a broad shareholder-base which includes two leading global
exchanges, Deutsche Bourse and Singapore Exchange as strategic partners. BSE provides an
efficient and transparent market for trading in equity, debt instruments, derivatives, mutual
funds. It also has a platform for trading in equities of small and medium enterprises (SME).

More than 5500 companies are listed on BSE making it world's No. 1 exchange in terms of listed
members. The companies listed on BSE command a total market capitalization of USD 1.68
Trillion as of March 2015. It is also one of the world's leading exchanges (5th largest in March
2015) for Index options trading (Source: World Federation of Exchanges).

1.3 STATEMENT OF PROBLEM

Financial scholars have been conducting studies of share price determinants for several decades;
but different researchers have come to different conclusions. Financial economists have come to
different conclusion about factors determining share price. A general question may arise in the
mind of the shareholders that the corporate dividend policy affects the value of their stocks. By
analyzing the dependency of the variables we can very well came to know the variable which has
more effect on the determination of share price. This will help the investor to invest in the right
share and maximize his returns.

1.4 OBJECTIVE OF THE STUDY

1. To identify the market price return for various selected scrips.

2. To identify the various factor of variables which affect market price returns.
3. To examine the consistency of select variables with respect to various scrips
4. To examine the consistency of select variables with respect to various sectors
5. To understand the correlation among the predictor variables.
6. To study the influence of select variables on market return of the scrips

1.5 SCOPE OF THE STUDY

Investments in equity are one of the most liquid forms of investments. Market price of the share
is one the most important factor which affects investment decision of investors. Since the equity
shares are traded, the market determines the price according to demand and supply and therefore
the share price witnesses’ fluctuations. When there is high demand for the equity, the chances of
price of the equity to go up will be reasonably bright. But the demand for the script is influenced
by many factors such as earning per share, book value per share, dividend per share, dividend
payout ratio, earning to price ratio, size of the company etc. By taking in to these facts, the study
has made an attempt to analyse the extent to which the market price is influenced by the
explanatory variables with the help of multiple regression.

The study takes into account the scrips of various sectors in the ‘BSE 500 A group’ from the year
2006 to 2013. The key variables used in the study are Dividend per share, Dividend payout ratio,
Earnings per share, Price Earnings ratio, Book value, Return on Networth and Dividend yield.
By taking these factors, the study has made an attempt to analyse the extent to which the market
price is influenced by the explanatory variables with the help of multiple regression.

1.6 RESEARCH METHODOLOGY

1.6.1 Hypotheses:

H0: There is no correlation among the variables.

H1: There is correlation among the variables.

H0: There is no correlation between market Price and the determinant variables.

H1: There is correlation between market price and the determinant variables

1.6.2 Sampling Method:

Judgment sampling technique is used in the selection of company and sector.

1.6.3 Statistical tools used:

Descriptive Statistics, Co-Variance, Correlation and Multiple Regressions

Co –variance is used to measure the consistency of the variables

Y’ = a+b1x1 +b2x2+……. bnxn

Regression model: Mathematically the equation is as follows

Where ,
Y is dependent variable
X is independent variable
a is intercept
b1 ...bn are co-efficient of X1, X2 ...Xn
 1.8 INTERPRETATION

The output the model summary reports a statistic that measures “goodness of fit “, show that
there are ten variable which are significant to the price determination, represented by R square. It
is the square of the coefficient of correlation. Since this is a multiple regression, we will ignore R
square, but adjusted R square will be used.

Table 1. Model Summary

Model R R Square Adjusted R Square Std. Error of the Estimate

1 .924a 0.853 0.839 230.16864

a. Predictors: (Constant), Log Sales, RONW, PE, BV, Net worth, DY, DPS, DP, Net Profit, EPS
Interpretation

The value of R^2 equals to 0.839 indicates that 83% of the script price of the industry is
explained by Log Sales, Net Profit, RONW, DP, PE, DPS, DY, EPS, BV of the share. The value
of (R^2) increases, when an additional explanatory variable is added to the model.

Table 2. ANOVA

Model Sum of Squares df Mean Square F Sig.

Regression 32570000.00 10 3257300 61.484 .000a

Residual 5615625.92 106 52977.6

Total 38190000.00 116

a. Predictors: (Constant), Log Sales, RONW, PE, BV, Net worth, DY, DPS, DP, Net Profit, EPS
b. Dependent Variable: PRICE

Interpretation
 The findings from the Fishers ratio (i.e. the F Statistics, which is a proof of the validity of the
estimated model) as reflected in table 4.2 G2 indicates that the F is about 61.484 and a p-value
that is less than to 0.05 (P-value=0.000), this invariably explains that the explanatory variables
are significantly associated with the dependent variable. That means they strongly determine the
behavior of the market values of share prices.

Table 3. COEFFICIENTS

Un standardized Standardized
Model Coefficients Coefficients t Sig.
B Std. Error Beta

(Constant) 46.821 108.093 0.433 0.666

DPS 40.547 3.085 0.817 13.141 0

DP -0.359 1.702 -0.016 -0.211 0.833

EPS 3.573 2.115 0.453 1.689 0.094

BV 1.062 0.489 0.248 2.172 0.032

PE 3.486 1.39 0.129 2.508 0.014

Net worth 0.075 0.027 0.304 2.82 0.006

Net Profit -0.383 0.121 -0.805 -3.167 0.002

DY -39526 4998.89 -0.568 -7.907 0

RONW 15.618 3.887 0.319 4.018 0

Log Sales 337.908 138.192 0.11 2.445 0.016

Interpretation:

The estimated regression equation from Table 4.2 G3 can be written as

Y = 46.821 + 40547X1 –0.359X2 + 3.573X3 + 1.062X4 + 3.486X5 + 0.075X6

-0.383X7 -39526X8 + 15.618X9 + 337.908X10,

Where

Y → Market Price
 X1 → DPS

X2 → DP

X3 → EPS

X4 → Book Value

X5 → PE

X6 → Net worth

X7 → net Profit

X8 → DY

X9 → RONW

X10 → Log Sales

The above estimated regression equation indicates that DPS, EPS, Book Value, PE, net worth,
RONW and Log Sales are positively related with market price as is evident from the positive
value of co-efficient (40.547, 3.573, 1.062, 3.486, 0.075, 15.618 and 337.908) but the DP, net
profit and DY are negatively related with market price as the co-efficients are negative (-0.359,
-0.383 and -39526). The inference of the above statement is when the DPS goes by one unit, the
market price would go up by 40.547 similarly EPS, Book Value, PE, net worth, RONW and Log
Sales increase by one unit, the market price would increase to 3.573, 1.062, 3.486, 0.075, 15.618
and 337.908 respectively. Among the positive impact of variables, log sales has made larger
impact on market price followed by DPS and RONW. In the same way when DY ratio increases
by 1 unit, the market price may go down by 39526.

Table 4 COEFFICIENT OF CORRELATION

 Net Net Log
DPS DP EPS BV PRICE PE DY RONW
worth Profit Sales

DPS 1 .521** .261** .537** .702** 0.002 -0.005 0.033 .652** .216* -0.127

-
DP .521** 1 .335** .260** .318** .295** -0.081 .591** -0.106 -.340**
0.049

- -
EPS .261** 1 .548** .239** .277** .898** .229* .731** -.248**
0.049 0.088

-
BV .537** .335** .548** 1 .521** .394** .324** .436** 0.089 -0.154
0.148

PRICE .702** .260** .239** .521** 1 .254** 0.038 0.027 0.091 .209* 0.132
 - - -.306*
PE 0.002 .318** .254** 1 0.114 0.001 * 0.074 -0.076
0.088 0.148

Net -
.295** .277** .394** 0.038 0.114 1 .521** 0.073 -0.021 -.280**
worth 0.005

Net -
0.033 .898** .324** 0.027 0.001 .521** 1 0.076 .680** -.295**
Profit 0.081

-.306*
DY .652** .591** .229* .436** 0.091 * 0.073 0.076 1 0.146 -.260**

-
RONW .216* .731** 0.089 .209* 0.074 -0.021 .680** 0.146 1 -0.05
0.106

Log - -.340* -.248* - - -.260*

* * 0.132 -.280** -.295** * -0.05 1
Sales 0.127 0.154 0.076

**. Correlation is significant at the 0.01 level (2-tailed).

*. Correlation is significant at the 0.05 level (2-tailed).

Interpretation

The Pearson co-efficient of correlation is used to find out the relationship between market price
of share and Log Sales, Net Profit, RONW, DP, PE, DPS, DY, EPS, BV at 1% and 5% level of
significance. It can be seen from the data in table 4.1G4, there is a positive correlation between
the independent variables DPS (correlation coefficient = 0.702, EPS (correlation coefficient =
0.260), EPS (correlation coefficient = 0.239), BV (correlation coefficient = 0.521), PE
(correlation coefficient = 0.254), Net worth (correlation coefficient = 0.038), Net profit
(correlation coefficient = 0.027) RONW (correlation coefficient = 0.209), log sales (correlation
coefficient =0.132). DPS, DP, EPS, BV, and PE are having the significant relationship with
dependant variable, i.e., Price at 1%significant level. Whereas, the RONW is having a significant
relationship with dependant variable price at 5% significant level. It indicates the independent
variables, viz., DPS, DP, EPS, BV, and PE are showing an impact on dependant variable price.

1.9 FINDINGS
• RONW is highly positively correlated with price for banking industry.

• Sales is highly positively correlated with price for cement industry.

• DPS has a larger impact on Price for electric utility industry.

• RONW is highly positively correlated with price for Heavy electrical industry.
• Sales is highly positive correlated with price for iron and steel industry.

• DPS and is highly positively correlated with price for IT industry.

• Sales and DPS have a larger impact on the independent variable Price for pharmaceutical
industry.

1.10 CONCLUSION
Understanding the impact of various fundamental variables on share price is very much
helpful to the investors as it will help them in taking profitable investment decisions. This
study analyses the impact of selected accounting variables, like book Value, dividend per
share, earnings per share, dividend payout ratio, dividend yield, return on net worth, net
profit , net sales and P/E ratio on the equity prices of listed companies in Bombay stock
exchange for the period 2005 to 2013. The results confirm the significance of DPS and
sales as determinants of market share price by the statistical tool of multiple regression.
Further, result of the study indicated that dividend per share being the strong
determinants of the market price; the study supports liberal dividend policy and suggests
company to pay regular dividends. This policy will affect the market price of the share in
positive direction.
Appendix 1
Sample unit

Sr no Industry No of Name of the companies

companies

1 Bank 22 Allahabad Bank, Andhra bank, Axis bank, BOB, Bank of India,
Canara Bank, corporation Bank, CUB, Dena Bank, HDFC
 Bank, IDBI Bank, ICICI Bank , Indusind Bank, ING vysya,
IOB, J&K Bank, Kotak Mahindra Bank, OBC, SBI, SIB,
Syndicate Bank, Uco Bank, Union Bank

2 Cement 6 Century Textiles, India Cement, J & K cement, Ramco

Cement, Shree Cement , Ultratech Cement

3. Electric Utility 6 Alstom , CESC, NTPC, Neyveli Lignite Corporation,,PTC,

Relinfra

4. Heavy Electrical 5 ABB, BHEL, Crompton Greaves, Siemens, Thermax

5. Iron and Steel 5 Bhushan Steel, Jindal Steel, JSW Steel, SAIL, Tata Steel

6. Information 10 CMC, Cyient, HCL Tech, Hexaware, Infy, KPIT, Mphasis,

Technology NIIT Tech, TCS , Wipro

7. Pharmaceutical 15 Aurobindo Pharma, Cadila, Cipla, Divis lab, Dr Reddy’s,

Glaxo, Glenmark,IPCA, Jubilant Life, Lupin, Natco, Pitamel,
Sanofi, SunPharma, torrent Pharma

Total 69

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