CHAPTER – 1INTRODUCTION

Boosting of nation's economic growth and solving the problem of

underdeveloped economy is widely depends upon the nature of its

economic infrastructure. One of the basic elements in achieving a self-

reliant growth of the economy and for sustaining the desired level of

economic development is an accelerated rate of investment or capital

formation in the economy and the rate of investment or capital

formation depends upon the efficiency of financial markets and

institutions. The financial systems or markets perform this function by

channeling the nation's saving into best uses. It does this by bringing

together those who have surplus funds to lend and those who wish to

borrow to finance their expenditures. This financial market is broadly

classified as Money Market and Capital Market. Money market refers to a

market where debt securities or less than one-year maturity are traded

whereas capital market is the market for long-term debt and corporate

stocks. The existence of an organized securities market is considered to

be a pre-requisite for a modern free enterprise as well as for a mixed

economy.

1.1 Capital Market:

Investment decisions are taken within the framework provided by a

complex of financial institutions and intermediaries, which together

comprise the capital market. “Capital market means any body or

individuals, whether incorporated or not, constituted for the purpose of

regulating or controlling the business of buying selling or dealing in

securities.” (Bhalla, 1995: 21) It is just the market for capital funds. The

word capital used in this context implies a long-term commitment on the

part of the lender and long-term need for the funds on the part of the

borrower. Both lenders and borrowers coming together in capital market

to play effective financial intermediary role in primary and secondary

market through the use of various long-term capital market instruments.

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It has a vital role in promoting efficiency and growth. It intermediates the

flow of funds from those who want to save a part of their income from

those who want to invest in productive assets. It is the market, which

provides the mechanism for channeling current savings into investment

in productive facilities, that is, for allocating the county’s capital

resources among alternative uses. In effect, the capital market provides

an economy’s link with the future, since current decisions regarding the

allocation of capital resources are a major determining factor of

tomorrow’s output. The capital market plays a crucial role in shaping the

individual investment and portfolio decisions.

Capital market consists of securities market and non-securities market.

Securities markets implies mobilization of the funds through issuance of

the securities like shares, bonds and debentures by corporate sector and

bond, bills and debentures by government. These securities traded in

the secondary market are generally negotiable and hence can be traded

in the secondary markets. Non-securities market refers to the

mobilization of the financial resources by the financial institutions in the

form of deposits and loans.

Primary and secondary markets are the two wings of the capital market.

Primary market concerns with the issue of new companies stock whereas

the secondary market deals with the previously issued shares. The

majority of all capital market transactions occur in the secondary

market. The proceeds from the sale of securities in this market do not go

to the original issuer which means that it does not create new additional

capital. In other words, securities are traded among the individual as

well as institutional investors.

The structure of capital market can be shown as follows:

Chart:1.1: Structure of Capital Market

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Capital Market

Security MarketNon-Security Market

Debt MarketEquity Market

Primary Market

Secondary Market

Corporate Debt Market

Government Debt

Bank Deposit

Business Venture

Fixed Assets

Other Sectors

1.2 Prices of Securities

The force of supply and demand interacts to determine a stock market

price. Prices move in trends because of an imbalance between supply

and demand. When the supply of a stock is greater than the demand,

the trend will be down as there are more sellers than buyers. When

demand exceeds supply, prices tend to rise. There are essentially two

concepts to explain the movement of stock price. They are

i) Technical Analysis

ii) Fundamental Analysis

In technical analysis, the analysis record historical financial data in

charts, study these charts in an effort to find meaningful patterns, and

use these patterns to predict future prices. Some charting techniques

are used to predict the movements of a single security; some are used

to predict the movements of a market index; and some are used to

predict both the action of individual securities and the market action.

Fundamentalists forecast stock prices on the basis of economic, industry,

and company statistics. The principal decision variables ultimately take

the form of earnings and dividends. The fundamentalist makes a

judgment of the stock's value with risk return framework based upon

earnings power and the economic environment. Fundamental analysis is

an essential, core skill for any investor as well as it helps to evaluate a

company on the basis of its sales, earnings, dividends, products,

management and other economical and industrial outlook.

1.3 Variables Affecting the Prices of Securities

Basically, price of securities is determined by the interaction of demand

and supply of corresponding securities. There are many other reasons

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Political FactorsPolitical Factors

-Dissolve of Parliament- Ashoj-18, 2059 Event-5 Parties Movement- Maoist Insurgency (Cease fire, Peace talk and rupture of peace talk and re-starting of war) - Sep-11, 2001 event of New York - Maoist Insurgency- World-Wide Terrorism - Sep-11 event

Stock Market Price

Stock Market Price

Socio-Cultural FactorsSocio-Cultural Factors

-Traditional Investment Procedure of Nepalese- Social Attitude and Beliefs toward Investment- Investors’ Knowledge on Stock Exchange

Technological FactorsTechnological Factors

- Evolving of E-transaction- Information on Web- OTC market- Traditional Way of Transaction in NSE

Economic FactorsEconomic Factors

- Dividend Policy and profitability of the Company- Present Economic Condition- Interest Rate and Inflation- Tax System- Nepal’s Entry in WTO- Government Monetary Policy- Fiscal and Monetary Policy

that cause the stock price fluctuation. Major of them can be classified as

political factors, economic factors, socio-cultural factors and

technological factors. These variables may be closely related to the

internal factors of the corresponding companies like the dividend policy

of the company, business volume and profitability position of the

company or to the external factors like the economic condition of the

nation, government’s monetary policy, political environment of the

country etc. For this research purpose some important variables of these

classified factors are taken and analyzed on the basis of primary as well

as secondary data. As a whole, these major factors (internal and

external) that affect the price of the security can be presented on the

following chart:

Chart 1.2 : Factors Affecting Price of Securities

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Out of these factors or variables the following major events or variables

have been taken for analyzing as research variables:

Event of “Ashwin-18, 2059 (4-Oct, 2002)”

Ceasefire on Magh 15, 2059 (29-Jan, 2003) and starting of peace-

talk

5 major political parties' movement during last seven months

Rupture of peace-talk and re-starting war at Bhadra-10, 2060

(August-27, 2003)

Nepal's entry in World Trade Organization (WTO) at Bhadra-25,

2060 (Sep-11, 2003).

1.4 Statement of the Problem

The number of public limited companies is increasing tremendously in

response to the economic liberalization and globalization policies

adopted by the Nepalese government. Such institutions are provide

banking services, insurance services and participating in developmental

works, manufacturing and processing and other various service sectors.

Although Nepal’s capital market’s history is short, the concept of capital

market is growing rapidly within a short span of time. It is mandatory to

enlist the public limited companies in Nepal Stock Exchange (NEPSE)

which creates liquidity on shares of such companies issued in the

primary market and provides floor for trading of shares. Up to now, there

are altogether 108 such companies, which are listed in NEPSE. (SEOBN-

Annual Report, 2002/03: 8)

Investors purchase the stocks of the companies through the primary

market (initial offering) or through the secondary market. Most of these

investors are not aware of the financial strength of the companies and

they do not analyze company’s financial indicators before they invest

their funds through secondary market – NEPSE. The market price of

common stock (share) does not seem to be in accordance with the

financial indicators – Net Worth per Share (NWPS), Earning per Share

(EPS), Dividend per Share (DPS) and last year's dividend. Instead, in

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determination of the market price of share, there has been major

influence of rumors rather than strength of the companies. The Market

Price per Share (MPS) of commercial banks, especially foreign joint

venture Banks' has been much higher than MPS of other sectors.

Moreover, the overall NEPSE is depended upon MPS of such companies.

Generally, the trend is that the MPS of public quoted companies is above

their book value. The market value is determined by the supply and

demand functions. However, in an efficient market MPS fully reflects all

the historical information publicly available.

Here arises the question of efficiency of the Nepalese share market. The

high movement of share prices may be the outcome of the efficient

market behavior. An article in Spot Light states that "our stock market is

not efficient enough since all the listed companies do not make past

information available to shareholders. Many listed companies do not

produce timely financial statement or annual reports to the investors.

The dubious and hazardous movement of share prices has no sound

fundamental backing of analysis and relationship to past results revealed

in limited calculated dividend yield, net worth and price multiples. The

investors conclude that there has been a foul play using inside

information. The reaction is based on the assumption of strong form of

the market efficiency. The Security Exchange Act strictly prohibits the

misuse of inside information but the regulating authorities can make no

advance notice of how there is the use of inside information" (Subedi,

2002: 5). It denotes that every investor should be well aware of the

degree of risks in which they are investing or going to invest their saving

funds. There are very few practices of analyzing this aspect in the

Nepalese context. Most of the investors are investing their funds

haphazardly without considering risk involved in their investments.

That’s why the major issues might be whether the MPS of listed

companies, especially for selected companies, are really representing

the financial indicators, i.e. NWPS, EPS, and DPS etc.

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More specifically, the research questions are:

1. What are the major financial indicators which have major influence

on determining the MPS?

2. Is there any specific relationship of MPS with fundamental

financial indicators (EPS, NWPS, DPS, and current year’s dividend)

or is the trend of MPS running in accordance with these financial

indicators?

3. Are the common stocks of the sampled companies are equilibrium-

priced?

4. How much the signaling and informational factors affect the share

price?

5. Whether the investors are aware of the trend of financial indicators

which have major influence on determining MPS and how much the

investor rational in terms of investment return of the common

stocks investment?

1.5 Objective of the Study

1. To identify of major financial indicators which affects on

determining the MPS.

2. To examine and evaluate the relationship of MPS with various

financial indicators like; EPS, NWPS, DPS and current year’s

dividend.

3. To identify whether stocks of the sampled companies are over-

priced, under-priced or equilibrium priced.

4. To study the signaling and informational effect on share price.

5. To examine Nepalese investors’ response on the change of price of

stock.

6. To provide suggestions on the basis of findings.

1.6 Limitation of the Study

The study will have some limitations. Basically the study is done for the

partial fulfillment of masters of business studies. Time constraints,

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financial problem and lack of research experience will be the primary

limitation and other limitations are as follows:

1. The study will confine only to Nepal Stock Exchange and its

members.

2. The study has to be done on the secondary data of selected ten

companies of financial indicators, five from private joint venture

banks and three from selected finance companies and rest two

from insurance companies among the companies in the NEPSE.

Due to the lack of data other sectors can not be used.

3. This research study is mainly based on secondary data, which

have been collected from books, financial statement and report of

the Security Board of Nepal (SEBON) and Nepal Stock Exchange

and selected company's' annual report, company's web site and

other publications. The study covers the information of only few

fiscal years' data.

4. Foreign information and rules affecting the share market is

ignored.

5. Studies and reference were also extremely limited in the

prospective of Nepalese stock market.

1.7 Test of HypothesisOn the basis of the earlier stated variables and events which affect the price of securities, the following hypotheses have been set:

1. Null Hypothesis: There is no significant change in share price

before and after the Ashwin-18, 2059 (4-Oct, 2002) event.

Alternative Hypothesis: There is significant change in share

price before and after the Ashwin-18, 2059 (4-Oct, 2002) event.

2. Null Hypothesis: There is no significant change in share price

before and after the Ceasefire on Magh 15, 2059 (29-Jan, 2003)

and starting of peace-talk.

Alternative Hypothesis: There is significant change in share

price before and after the Ceasefire on Magh 15, 2059 (29-Jan,

2003) and starting of peace-talk.

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3. Null Hypothesis: There is no significant change in share price

before and after the five major political parties' movement.

Alternative Hypothesis: There is significant change in share

price before and after the five major political parties' movement.

4. Null Hypothesis: There is no significant change in share price

before and after the rupture of peace-talk and re-starting war at

Bhadra-10, 2060 (August-27, 2003).

Alternative Hypothesis: There is significant change in share

price before and after the rupture of peace-talk and re-starting war

at Bhadra-10, 2060 (August-27, 2003).

5. Null Hypothesis: There is no significant change in share price

before and after Nepal's entry on WTO on Bhadra-25, 2060 (Sep-

11, 2003).

Alternative Hypothesis: There is significant change in share

price before and after the Nepal's entry on WTO on Bhadra-25,

2060 (Sep-11, 2003).

1.8 Organization of the StudyThe whole study will be divided into following five chapters:

Chapter 1: First chapter deals with introduction. This includes

background, statement of problem, objectives of the study,

limitation of the study and organization of the study.

Chapter II: Second chapter deals with the review of available

literature. It includes review of previous unpublished

Master degree thesis, books, journals, articles etc.

Chapter III: Third chapter explains the research methodology used in

the study. It includes research design, population and

sampling, sources of data, method of data analysis and

research variables etc.

Chapter IV: This chapter includes the brief outline of stock market in

Nepal.

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Chapter V: The fifth chapter, the important chapter of the study will be

the presentation & analysis of data.

Chapter VI: The sixth & last chapter summarizes the main conclusion

that flows from the study and offers suggestion for further

improvement and conclusion of the study.

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CHAPTER - 2REVIEW OF LITERATURE

The basic concern of the study is to focus on the pricing behaviour of the

stocks of the companies listed in Nepalese Stock Exchange. So, in this

chapter, an attempt is made to review some of the literature concerning

the stock market in Nepal and aboard as well as the market price

behaviour. The price behaviour of the stock and its trading activity has

got the tremendous concentration in security investment. So, a better

understanding of these determinants may increase investors' confidence

in the stock market and thereby enhance the effectiveness of corporate

resource allocation. Hence more and more concerns over pricing

behaviour are arising and most of the concerned books bear some

paragraph on this issue.

2.1 Conceptual Framework:

2.1.1 Capital Market:

A place where long term lending and borrowing takes place is known as

capital market. Therefore, the capital market is the market for long term

borrowing and lending. The primary instruments of the capital market

are stock and bonds (equity and debts). Therefore it includes both the

new issue market and the old market. Capital market is concerned with

long term finance; widely it consists of series of channels through which

the saving of the community are made available for industrial and

commercial enterprises and authorities. It is concerned with that private

saving, individual as well as corporate, that are turned into investment

through new capital issue and also new public loan floated by

government and semi government bodies. In capital market demands for

funds comes from agriculture, industry, trade and government while the

supply of funds comes from individual or corporate savings, institutional

investors and surplus of government.

The history of capital market is not so old for Nepalese context. The

Capital Market was developed by the establishment of Security

Exchange Center on 2033 B.S. The number of listed companies and their

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trading was very negligible until the government of Nepal has made

economic reforms along with broad financial policy in the process of

economic liberalization. The privatization of public entities has been

started and various banking and finance companies as well as other

companies in the private sector are being established with local and

foreign investments. As they were established as public companies,

these companies have to issue some of their share of the general public.

So, the development of the security market in Nepal takes its pace only

the establishment of these banking and finance companies.

2.1.2 Security Market:

Security Market interchangeably known as the integral part of capital

market is in fact basis of the economy of a country. The most effective

use of idle and surplus resources can be brought into practice only by

means of market mechanism. Security market, a structural network of

savers and users of fund, is such a market mechanism which mobilized

the fund of savers to the users and thus this financialization boosts the

industrialization and trading activities, which will bring the positive result

to the economy as a whole. (Sharma, 2002:16)

There are two important functions of securities market, namely the

raising of funds in form of shares and debentures and trading in the

securities already issued by companies. While the first aspect is

obviously much more important from the point of view of economic

growth, the second aspects is also considerably important. In fact, if

facilities for transferring of existing securities are abundant, the raising

of new capital is considered assisted as the buyer of a new issue of

security become confident that whenever he wants to get cash he can

find a buyer of the security without much difficulty. This aspect is called

the liquidity of the stock market. Thus the liquidity of the stock market

affects the raising of new capital from the market. (Levine, 1992: 33)

Security market sets a price for the securities it trades and makes it easy

for people to trade them. Securities market facilitates the sale and resale

of transferable securities. The security market can be defined as a

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mechanism for bringing together buyer and sellers of financial assets to

facilitate trading. Securities market is classified into two; the market in

which new securities are sold is called the primary market and the

market in which existing securities are resold is called the secondary

market. Secondary markets are created by brokers, dealers and market

makers. Brokers bring buyer and seller together with themselves

actually buying or selling; dealers set price at which they themselves are

ready to buy and sell (bid and ask price respectively). Broker and dealer

come together organized market or in stock exchange. (Gitman, 1992:

457)

2.1.3 Stock Exchange:

The stock exchange is an institution where quoted securities are

exchanged between buyers and sellers. The stock exchange provides

market in a wide range of traded securities, generally of medium to long-

term maturities, issued by companies, government and public

organizations. (Winfield, 1985: 22)

Most of the investors are attracted to the equity shares because of its

marketability and liquidity. One may like to buy more shares or selling

existing shares from time to time when he is in need of money or when

he wants to shuffle his portfolio. Since the stock exchange is a place

where a large number of buyers and sellers congregate, one can, by and

large, easily find his counterpart for sale or purchase of shares. The

investor can convert his shares into cash at the prevailing market prices

readily. The existence of a stock exchange facilitates all these functions

without which it is almost impossible to do so.

The key function of securities exchange is to create a continuous market

for securities at a price that is not very different from the price at which

they were previously sold. The continuity of securities market provides

the liquidity necessary to attract investor's funds. Without exchanges,

investors might have to hold debt securities to maturity and equity

securities indefinitely. It is doubtful that many people would be willing to

invest under such conditions. A continuous market also reduces the

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volatility of security prices further enhancing liquidity. (Gitman, 1992:

458)

The securities exchanges help to allocate scare fund to the best uses.

That is by disclosing the price behavior of securities and requiring the

disclosure of certain corporate financial data; they allow investors to

access the securities risk and return and to move their fund into the

promising investments. An efficient market is one that allocates fund to

the most productive uses. Along with this, there is lot of functions of

security exchange such as ready market and continuous market,

evaluation of securities, safety of transactions, canalization of savings

and widening the share ownership etc. However, besides these

functions, there are three things a security exchange must do:

Determine a fair price for the securities it trades or price discovery

function.

Enable transaction to be made at as low cost as possible or

minimization of transaction cost.

Enable transaction to be made at this price quickly and easily or provision for liquidity.

Main Function of Stock Exchange: Price Discovery

Security is a legal representation of the right to receive future benefits

under conditions. Its value depends on expectation of the amount of

those benefits and evaluation of risk involved. Expectation and

evaluation reflect both the information available and the conclusions

people draw from that information. Since the market may quite big, no

single buyer or seller can influence the price of a share to any significant

extent.

Price discovery is the process of arriving at fair prices for securities. Fair

price indicates the compromise between fair offer price (lowest price at

which any well informed trader willing to sell) and fair bid price (highest

price any well informed buyer is willing to pay). Different markets do this

in different way and different ways of organizing a market affect how

closely the market approaches the ideal of fair prices. However, a very

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important fact that should not be forgotten is the concept of ideal

market or market efficiency, which also the necessary pre-condition for

approaching to the fair price. In an ideal market value of securities equal

its price of securities and prices reflects all available information about

the market.

In the securities market there is a great importance of demand and

supply for price fixation. The price of a given stock is determined

exclusively by the interacting forces of supply and demand converting

on such stock at a given time, that the price and volumes of its past

transactions are meaningful indications of the probable relationship of

the future and demand pressure it is likely to encounter in the market

and that such relationship is the most important element in determining

the probable direction of the price movements. (Ackerman, 1980: 85)

The stock exchange produces, through its continuous process of

evaluation, prices of securities, as close as possible to investment value

based on present and future income yielding prospects of various

enterprises, capitalized at 'notional rate of interest' the rate which will

prevail if and when all the liquid savings are employed into productive

purposes. (Gupta, 1982: 148)

2.1.4 Price Determination:

The share price is determined in the floor by the interaction of market

forces i.e. demand and supply. The price is determined by the point of

equilibrium between supply and demand, the shifting of this balance

results in incessant adjusting of price in search of the ever-changing new

equilibrium. Then market price moves upward and downward. There are

many other reasons that causes the stock price fluctuation, major of

them are economic, non-economic and market factors.

Dividend is the most important factors on the determination of stock

price. Dividends are strongly influenced by the earnings power of the

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firm. There is a very close correlation between corporate earnings &

dividends. Earning power, in turn, is strongly influenced by interest rates.

In this way, the most fundamental factor in stock price fluctuation lies in

changes in corporate earnings, which together with interest rates and

business cycle trends, contribute to making up the economic factors

influencing stock price.

The next influencing factors are non-economic factors, including changes

in political conditions, such as administrative changes, change in the

weather and other natural conditions, and changes in cultural conditions,

such as technological advance and the like. Similarly the other

influencing factors are market factors, or internal factors of the market,

considering of the tone of the market and supply-demand relations, may

be cited as the third category, that influences the stock prices. Besides

these factors the stock prices are influenced by the corporate

performance of the company, company’s policy regarding the

capitalization of earnings as well as government rules & signaling effect

of the market.

2.1.5 Theory of Price Behavior

The forces of supply and demand interact to determine a stock market

price. If demand is high and supply is low then the price of stock goes up

and vice-versa. There are essentially two schools of thought to explain

the stock price behavior. They are:-

i) Inefficient Market Theory

ii) Efficient Market Theory

Inefficient Market Theory:

Conventional approach has considered that market is inefficient, which

includes technical analysis theory. “Prior to the development of the

efficient market theory, investors were generally divided into two

groups, Fundamentalists and Technicians.” (Reilly, 1986: 347) The two

groups are analyzed as follows:

Technical Analysis

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Technical analysis is based on the widely accepted premise that security

prices are determined by the supply of and demand for securities. The

tools of technical analysis are therefore designed to measure supply and

demand. Typically, technical analysts record historical financial data on

charts, study these charts in an effort to find meaningful patterns to

predict future prices. Some charting techniques are used to predict the

movements of a single security; some are used to predict the

movements of a market index; and some are used to predict both the

action of individual securities and the market action. The basic

assumptions underlying technical analysis are listed below:

- Market value is determined solely by the interaction of supply and

demand.

- Supply and demand is governed by numerous factors, both

rational and irrational.

- Aside from the effected of minor fluctuations in the market, stock

prices tend to move in trends that persist for appreciable lengths

of time.

- Changes in trends are caused by shifts in supply and demand.

- Shifts in supply and demand, no matter why they occur, can be

detected sooner or later in charts of market action.

- Some chart patterns tend to recur, and these recurring patterns

can be used to forecast price movements.

Technical theory involves study of the past volume and price data of the

securities to predict future price fluctuations. Technical analysis theory

of share price behavior is based on past market information. On the

assumption that history tends to repeat itself, it is believed that

knowledge of past patterns of share prices will help to predict future

prices under similar circumstances. It involves the study of past market

behavior with reference to various financial and economic variables are

to forecast the future. The changes occur in financial and economic

variables are to be adjusted in the light of the present situation.

Technical analysts or chartist, as they are commonly called, believe that

they can discern patterns in price or volume movements, and that by

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observing and studying the past behavior patterns of given stocks, they

can use this accumulated historical information to predict the future

price movements in the security. Technical analysis comprises many

different subjective approaches, but all have one thing in common that

is, belief that these past movements are very useful in predicting future

movements. Technical analyst believes in the theory behind chart

formations and patterns. They read charts much like ancient astrologers

read the stars, looking for "head and shoulders" formations. These, they

believe, reflect the patterns of buying and selling, accumulation and

distribution, or market psychology.

Stock prices always move in trends because of an imbalance between

supply and demand. When the supply of a stock is greater than the

demand, the trend will be down as there are more sellers than buyers;

when demand exceeds supply, the trend will be up as buyers "bid up"

the price; and if the forces of supply and demand are nearly equal, the

market will move sideways in what is called a "trading range".

Eventually, new information will enter the market and the market will

begin to trend again either up or down, depending on whether the new

information is taken as positive or negative. Trend which are very brief

are called minor trends; those lasting a few weeks are known as

intermediate trends; and trends lasting for a period of months are major

trends. By analyzing trend lines we can determine what trend is in force.

It helps us to act safe in market both in bullish and bearish market.

Price moves in trends. A trend indicates there exist an inequality

between the forces of supply and demand. Such changes in the forces of

supply and demand are usually readily identifiable by the action of the

market itself as displayed in the prices. Certain patterns or formations

that appear on the charts have a meaning and can be interpreted in

terms of probable future trend development.

Dow Theory

The Dow Theory is one of the oldest and most famous technical tools

and was originated by Charles Dow, who founded the Dow-Jones

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Company and was the editor of The Wall Street Journal around 1900. The

Dow Theory is used to predict traversal and trends in the market as a

whole or for individual securities. According to Charles Dow, the market

is always considered as having three movements, all going at the same

time. The first is the narrow movement form day to day. The second is

the short-swing, running from two weeks to a month or more; the third is

the main movement covering at least four years in duration.

Dow Theory practitioners refer to these three components as:

1. Primary Trends: They are commonly called bear or bull markets.

Delineating primary trends is the primary goal of the DOW

theorists.

2. Secondary Movements: Secondary movements are sometimes

called corrections which last only a few months.

3. Tertiary Movements: These are simply the daily fluctuations.

The Dow Theory asserts that daily fluctuations are essentially

meaningless random wiggles. Nonetheless, the chartists should

plot the asset's price or the market average each day in order to

trace out the primary and secondary trends. (Francis, 1986: 524)

Fundamental Analysis

Fundamental analysis approach involves working to analyze different

factors such as economic influences, industry factor, governmental

actions, firm’s financial statement, its competitor and pertinent company

information like product demand, earnings, dividends and management

in order to calculate an intrinsic value for firms’ securities. The analyst

who believes on fundamental facts to determine the intrinsic value of

stock is popularly known as fundamental analyst or fundamentalist.

Fundamentalists forecast stock price on the basis of economic, industry

and company statistic. The principal decision variables ultimately take

form of earrings and value with as risk- return framework based upon

earning power and the economic environment. “Fundamental analysts

believe into companies’ earnings, their management, economic outlook,

firms’ competitor's market conditions and many other factors.” (ibid)

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The objective of fundamental security analysis is to appraise the intrinsic

value of a security. The intrinsic value is the true economic work of

financial assets. “ The fundamentalists maintain that any points of time

every stock has an intrinsic value, which should in principle be equal to

the present value of the future stream of income from that stock

discounted at an appropriate risk related rate of interest”(Bhalla, 1983:

283). Therefore the actual price of security is considered to be a function

of a set of anticipation. Price changes as anticipation changes which in

turn change, as a result of new information. In other words; a new piece

of news is released, securities market prices will adjust towards the new

values.

“The value of common stock is simply the present value of all the future

income which the owner of the share will receive”(Francis,1986: 398).

And the actual price should reflect intrinsic value of the stock i.e. good

anticipation of cash flows and capitalization rate corresponding to future

time period. But in practice, first it is not known in advance what the

appropriate discount rate should be for a particular stock. Therefore

fundamentalists estimate their intrinsic value by studying in detail of all

matters that is relevant to company. There are various models developed

by fundamentalists to reflect the price of the securities. Some of them

are as follows:

Capital Assets Pricing Model (CAPM)

The basic foundation of the theory was laid down in the microeconomics

studies of mean variance choice by Mrkowitz (1959) and Tobin (1958).

The critical extension to equilibrium in the capital market, and the

development of the CAPM, was accomplished by Sharpe(1964) and

Lintner (1965) (Stephen, 1978: 886). Like the portfolio models of

Markowitz and Tobin, the Sharpe-Lintner asset pricing model assumes a

market of risk-averse consumers who can make portfolio decisions on

the basis of the means and standard deviations of one period portfolio

returns, implicitly assuming that these standard deviations exist (Fama,

1971: 30). The CAPM substantiated the idea that, in competitive

20

equilibrium, assets earn premium over the risk less rate that increase

with their risk, by showing that the determining influence on risk

premium is the covariance between the asset and the market portfolio,

rather the own or intrinsic risk of the asset.(Stephen, 1978: 886) CAPM is

concerned with two key questions:

What is the relationship between risk and return for an efficient

portfolio?

What is the relationship between risk and return for an individual

security?

The CAPM is based on the following assumptions:

Individuals are risk averse

Individuals seek to maximize the expected utility of their portfolios

over a single period planning horizon.

Individuals have homogeneous expectations they have identical

subjective estimates if the means, variances and co-variances

among returns, expected returns & standard deviations.

Individuals can borrow and lend freely at a risk free rate of

interest.

The market is perfect; there are no taxes, there are no transaction

costs; securities are completely divisible; the market is

competitive.

The quantity of risky securities in the market is given.

Gorden’s model:

As per the Gorden’s model about relationship of dividend policy and

stock price, investors are not indifferent between current dividends and

retention of earnings. An increase in dividend payout ratio leads to

increase in the stock prices for the reason that investors consider the

dividend yield is less risky than the expected capital gain. Similarly

investors required rate of return increases as the amount of dividend

decreases. This means that there exists a positive relationship between

the amount of dividend and the stock prices.

The model is based on the following assumptions:

The firm is an all-equity firm.

21

No external financing is available.

Internal rate of return (r), appropriate discount rate (Ke) are

constant.

The firm and its stream of earnings are perpetual.

The corporate tax, do not exist.

The retention ratio (b) once decided upon is constant. Thus the

growth rate (g=br) is constant forever.

The discount rate is greater than growth rate, K>g.

As per this model, the relationship between stock price and dividend

varies on the following stages:

a) Growth firm (r>k): In case of growth firm the share price tends to

decline in correspondence with increase in payout ratio or decrease

in payout ratio or decrease in retention ratio. It means high dividend

leads to increase in share prices. Therefore dividends and stock

price are negatively correlated in such firms.

b) Normal Firm (r=k): The price of share remains constant

regardless of change in dividend. It means dividend and stock price

are free from each other in normal firm.

c) Declining Firm (r<k): The share price tends to rise in

correspondence with rise in dividend payout ratio. It means dividend

and stock prices are positively correlated with each other in a

declining firm.

J. E. Walter’s model:

As per the study of J. E. Walter on the relationship of dividend and stock

price, dividend policy of a firm affects its stock price. The relationship

between firms internal rate of return and cost of capital are the

determining factors to retain profits or distribution of dividend. The stock

price will be increased with the increase in the retention ratio of the firm

when the internal rate of return is greater than the cost of capital. Thus,

as per Walter zero dividend policy will maximize the market value of

share for growth firms.

Assumptions of Walter’s model:

22

Retained earnings constitute the exclusive sources of financing.

The firm does resort to debt or equity financing.

The firm’s internal rate of return and its cost of capital are

constant.

Value of earning per share (EPS) and dividend per share (DPS) are

remain constant.

The firm has perpetual life.

The firm distributes its entire earnings or retains it for immediate

reinvestment.

The relationship between stock price and dividend varies on the

following stages:

a) Growth Firm (r>k): If the firm’s internal rate of return exceeds

the cost of capital such firms are known as growth firms. The

relationship between dividend and stock price is negative on such

firms. It means that more dividend leads to decrease in stock price

and zero dividend will maximize the market value of shares for

such growth firms.

b) Normal Firm (r=k): If the firm’s internal rate of return and cost of

capital are equal, such firms are called normal firms and there is

no role of dividend on such firm’s stock price. Dividend payout

ratio does not affect the value of share whether the firm retains

the profit or distributes dividend.

c) Declining Firm (r<k): If the firm’s internal rate of return is less

than cost of capital, such firms are known as declining firms. The

relationship between dividend and stock price is positive that is

increase in dividend per share leads to increase in stock price of

such firms.

Thus, Walter concluded that when the firm is in growth stage then

dividend is negatively correlated with price of share. Similarly, in normal

firm there is no relationship between dividend and stock price. In the

same way, there is positive relationship between dividend and price of

stock in declining stage of firm.

23

Efficient Market Theory:

In a competitive market, the equilibrium price of any goods or services

at a particular movement in time is such that the available supply is

equated to the aggregate demand. This price represents a consensus of

the members trading in the market about the true worth of the good or

service, based on all publicly available information. As soon as a new

piece of relevant information becomes available, it is analyzed and

interpreted by the market. The result is a possible change in the existing

equilibrium price. The new equilibrium price will hold until yet another bit

of information is available for analysis and interpretation. “The role of

information is two-fold: (a) to aid in establishing a set of security prices,

such that there exist an optimal allocation of resources among firms and

an optimal allocation of securities among investors, and (b) to aid the

individual investor, who faces a given set of prices, in the selection of an

optimal portfolio of securities.” (Sharma, 2002: 27)

The word “Efficiency” as applied to securities market has unfortunately

been used to represent a variety of logically distinct concepts. In

particular it means: a) exchange efficiency (b) production efficiency and

(c) information efficiency. In this study, it is concerned only with

informational efficiency. “In an efficient market security prices ‘fully

reflect’ available information” (Fama, 1976: 133). Regardless of the form

of information, it is the key to the determination of stock prices;

therefore, it is the central issue of the efficient market concept.

An efficient market can exist if the following events occur:

1) A large number of rational, profit maximizing investors exist who

actively participate in the market by analyzing, valuing and trading

stocks. These investors are price takers; that is, one participant alone

can not affect the price of a security.

2) Information is free of cost and widely available to market participants

at approximately the same time.

3) Information is generated in a random fashion such that

announcements are basically independent of one another.

24

4) Investors react quickly and accurately to the new information,

causing stock prices to adjust accordingly. (Charles, 1943: 425)

In such a market, the current prices of a security obviously “Fully

Reflect” all available information. Similarly, “in a perfect and competitive

economy compared of rational individual with homogeneous beliefs

about future prices, by any meaningful definition present security prices

must fully reflect all available information about future prices.”

(Rubinstien, 1975: 812)

In an efficient market, market participants, acting in their own self-

interest, use available information to attempt to secure more desirable

(higher returns, ceteris paribus) portfolio position. In doing so they

collectively ensure that price movements in response to new information

are instantaneous and unbiased and will ‘fully reflect’ all relevant

information. Competition among participants to secure useful

information will drive security prices form one equilibrium level to

another so that the change in price in response to new information will

be independent of the prior change in price. Price change will be random

walk in response to the information.

“In an idle efficient market, every one knows all possible-to-know

information simultaneously, interprets it similarly, and behaves

rationally.” (Bhalla, 1974: 2). In such a world, the only price change that

would occur is due to the result from new information. “An initial and

very important premise of an efficient market is that there are large

numbers of knowledgeable and profit maximizing investors adjust the

information rapidly.” (Reilly, 1986: 166) “The degree of market efficiency

has important implications for the economy and for the investment

decision-makers. In an economic sense, it is important that security

prices provide accurate signals that can be used to allocate capital

resources correctly. Mis-priced security result in incorrect allocation of

capital.” (Cheney, 1997: 746)

In such a market, all prices are correctly stated and there are no

“bargains” in the stock market. “Efficiency in this context means the

25

ability of the capital markets to function so that prices of securities react

rapidly to new information. Such efficiency will produce prices that are

appropriate in terms of current knowledge, and investors will be less

likely to make unwise investments. A corollary is that investors will also

be less likely to discover great bargains and thereby earn extraordinary

high rates of return.” (Bhalla, 1974: 3)

The conclusion is that – “In an efficient market there are neither free

lunches nor expensive dinners. It is not possible to systematically gain or

lose abnormal profits from trading on the basis of available information.”

(Weston and Copland, 1996: 93-94). No one can consistently do better

than the average. “Efficient market theorists believe that some do better

then average because of luck. In fact they suggest that the ‘traders’ –

those who buy and sell their stocks frequently – do less well than the

stock market averages by an amount equal to the commissions they

pay.” (Rubinstien, 1975: 815)

One set of test of market efficiency examines the informational

efficiency of security prices. Existing model of efficient markets imply

that all relevant information regarding given stock is reflected in its

current market price. This notion of market efficiency can be divided into

three categories based on type of information used in making market

decisions. They are explained as follows:

a) Weak Form Market Efficiency: “Weak form market efficiency

hypothesizes that today’s security prices fully reflect all

information contained in historical security prices. This implies that

no investor can earn excess returns by developing trading rules

based on historical price or return information” (Weston and

Copland, 1996: 94)

b) Semi-strong Form Market Efficiency: It says that security

prices fully reflect all publicly available information. Thus, no

investors could earn excess return using publicly available

resources such as corporate annual reports, NEPSE price

information or published investment advisory reports. It contains

26

all publicly available data such as earnings, dividends, stock split

announcements, new products development, financing difficulties

and accounting changes. A market that quickly incorporates all

such information into prices is said to be semi-strong efficient. “If

the semi-strong hypothesis is true, then only a few than what

could be earned by using a naïve buy-and-hold strategy.” (Francis,

1986: 608)

c) Strong Form Market Efficiency: “The most stringent form of

market efficiency is the strong form, which asserts that prices fully

reflect all information, public and non public.” (Jones, 1943: 429) In

such kind of market, no group or investors should be able to earn,

over a reasonable period of time, excess rates of return by using

publicly available information in a superior manner. “An extreme

version of the strong form holds that all non public information,

including information that may be restricted to certain groups such

as corporate insiders and specialists on the exchanges, is

immediately reflected in prices. In effect, this version refers to

monopolistic access to information by certain market participants.”

(ibid)

Chart: 2.1 : Market Efficiency in Three Information Level

27

Strong FormAll Information

Semi-Strong FormPublic Information

Weak-Form Market Data

These three hypotheses are not mutually exclusive; they differ only in

the degree of market efficiency. It is notable point that a semi-strong

efficient market encompasses the weak form of the hypothesis because

price and volume data are part of the larger set of all publicly available

information. Strong-form efficiency encompasses the weak and semi-

strong forms and represents the highest level of market efficiency. It is

necessary for the weak form hypothesis to be true in order to the semi-

strong and strong form hypothesis to be true.

2.2 Review of Stock Market in International Context:

Numbers of research studies have been performed internationally on the

stock market. Some of them are as follows:

In 1900, Louis Bachelier first tested the random walk model. He tested

the model in commodity prices and found that those prices followed a

random walk. He presented the evidence that the commodity

speculation in France was a fair game. He also concluded that the

current price of a commodity was an unbiased estimate of its future

price. After the discovery of this model, large numbers of studies have

been done throughout the world.

In 1927, Slutsky proved that the randomly generated price changes look

like stock price changed and that they appear to exhibit cycles and other

patterns.

In 1933, Alfered Cowels found little evidence that stock market analysis

could predict future prices.

In 1937, Alfered Cowels and Herbert E. Jones reported that stock prices

moved with predictable trends. They gave a controversy to the random

walk model as valid share price behavior model in USA. This finding

remained a challenge against the random walk hypothesis for more than

two decades.

In 1953, Kendall made significant contribution to advance in the study of

the random walk model. He tested the model on the weekly price

28

changes of the 19 indices of British industrial shares and in the spot

price series of cotton (New York) and wheat (Chicago). He analyzed the

data by serial correlation coefficient and concluded that the subsequent

stock price movement forms random walk. He showed that the

successive price changes are statistically independent to its past price

changes.

In 1959, H.V. Roberts carried out simulation tests by comparing the

simulation of random numbers and the Dow Jones Industrial Average

Index (DJIA) for about one year starting from Dec-30, 1995 to Dec-28,

1956 and found similarity between these two series. He further observed

that the first difference of these two series produce the same pattern.

His work was significant in that he gave a number of methodological

suggestions for testing what he calls the chance model. In particular, he

suggested runs analysis for testing independence of price changes.

Moore (1962) studied weekly price changes of 30 randomly selected

stocks for the period 1951 to 1958 and found an average serial

correlation coefficient 1.06. The value was extremely low and indicated

that the weekly change data had almost no power in predicting future

prices changes.

Fama's study (1965) on the random walk model was one of the best

definitive and comprehensive ever study conducted. He observed the

daily proportionate prices of each 30 individual stocks of the Dow Jones

Industrial Average. The time periods covered started from end of 1957 to

26th, September 1962. He employed the statistical tools such as serial

correlation and runs tests to draw inference about dependence of the

price series. He calculated auto correlation coefficient for daily change in

log price series. He calculated auto correlation coefficient for daily

change in log prices for lag from 1 to 30 and found that the coefficient

for daily changes in average was +0.30, which is near to zero. But on the

daily price change in log prices for lag from 1 to 30 and found that the

coefficient for daily changes in average of +0.30, which is near to zero.

But on the daily price changes, 11 out of 30 stocks had correlation

29

coefficient more than twice their computed standard errors. The

coefficients ranged from smallest 0.06 to the largest 0.123. However,

Fama concluded, "Dependence as such as a small order of magnitude is

from a practical point of view, probably unimportant for both the

statistician and the investor". He also calculated serial correlation for lag

from 1 to10 for non-overlapping differencing intervals of four, nine and

sixteen days to examine the possibility if price change across longer

interval show dependence. All the results are again not significantly

different from zero.

Roa and Mukherjee (1971) applied spectral analysis to weekly prices of

an aluminum company's share and found no evidence contrary to

random walk model.

Fama and French (1998) pushed the common expected returns

argument for market efficiency one step further. They argued that there

are systematic patterns in the variation of expected returns through

time that suggested that it is rational. They find that the variation in

expected returns tracked by D/P or the default spread (the slopes in the

regressions of returns on D/P or the default spread) increase from high

grade bonds to low grade bonds, from bonds to stocks, and from large

stocks to small stocks. This ordering corresponds to intuition about the

risks of the securities. On the other hand, the variation in expected

returns tracked by the term spread is similar for all long term securities

(bonds and stocks), which suggests that it reflects variation in a common

premium for maturity risks. (Fama, 1991: 1584)

C.B. Gupta had commented that the capital market serves as a link

between suppliers and users of finance. It is a mechanism for the

mobilization of public savings and channeling them in productive

investments (Gupta, 1978: 325). Thus capital market works as a

powerful medium between potential investors and users of finance.

Formally the necessity of the capital market was felt not only by the

developed countries like U.S.A., U.K., Germany etc. but later as a

passage of time even the developing countries like India, Philippines,

30

Bangladesh, Nepal etc begins to feel its necessity. Now they adopted it

too.

In connection with the necessity of capital market, S.L.N. Simha in his

book "The Capital Market in India" has observed that capital is an

extremely fascinating subject. An efficient capital market is an

indispensable pre-requisite to economic development. In fact even as

regards the resources for the public sector, the capital market has a

rather important role to play (Simha, 1960: 1).

The study conducted by Bary Borsworth on ' Industrial Production and

Price of Common Stock', 1953-1975 has revealed that the stock market

and economic activity move in similar cyclical patterns. This

fundamental relationship shows that the stock price is meaningful in the

sense of reflecting real economic variables.

The investment decision in the stock market is a function of the

prevailing market price and return to capital. By return to capital is

meant the algebraic sum of increment in the value of yield (Dookha,

1962: 82).

A senior economist, Ross Levine in the finance and private sector

department division of World Bank's Policy Research Department, has

mentioned in his article that stock market may affect the economic

activity through the creation of liquidity. Many profitable investments

require a long-term commitment of capital, but investors are often

reluctant to relinquish control of their savings from long periods. Liquid

equity markets make investment less risky and more attractive because

they allow savers to acquire an asset-equity and to sell it quickly and

cheaply if they need access to their savings or want to alter their

portfolios. At the same time, companies enjoy the permanent access to

capital raised through issues. By facilitating long-term, more profitable

investments, liquid markets improve the allocation of capital and

enhance the prospect for the long -term economic growth. Further by

making investment less risky on more profitable stock market liquidity

can also lead to more investment (Levin, 1996: 133).

31

“Common stock has one important investment characteristic and one

important speculative characteristic. Their investment value and

average market price tend to increase irregularly but persistently over

the decades as their net worth builds up through the reinvestment of

undistributed earnings. However, most of the common stocks are subject

to irrational and excessive price fluctuations in both decisions as the

consequence of the ingrained tendency of most people to speculative or

gamble, i.e. to give way to hope, fear and greed.”(Chandra, 1995: 35)

Hara, on the article on Financial Journal writes that information plays

important role in the discovery of assets (securities). Further the writer

says that, “The premise developed in this talk is that liquidity and price

discovery are important dimensions of asset markets and, by extension,

of asset prices. That information should affect asset prices is hardly new;

finance researchers have long focused on the information efficiency of

asset prices. The innovation here is the argument that when information

is asymmetric, uniformed investors demand compensation for portfolio-

induced risks which they cannot diversify.”

“Note that my arguments do not imply that markets are necessarily

inefficient; there are no arbitrage opportunities here, nor is there the

provisional free lunch. Traders with superior information will move prices

toward full information levels, but continuously attaining full information

levels is not credible– new information arrives, old information is

obsolete. Market prices can be martingales with respect to information,

but if traders have diverse information sets, then these expectations

need not be the same across traders. Thus, as in microstructure models,

the adjustment of prices of full information values can differ widely

across markets that are deemed efficient. And it is this difference in

adjustment that gives rise to the effects discussed here.” (Hara, 2003:

1351)

2.3 Review of Journals, Books and Articles of Stock

Market in Nepalese Context:

32

As stock market is in infancy stage in Nepalese context, there are limited

books, journals and research studies concerning stock market and its

pricing behaviour. So, the available articles, books, previous research

works, which are related to stock market are consulted and reviewed.

A book about capital market by Dr. R.S.Mahat entitled "Capital Markets

Financial Flows and Industrial Finance in Nepal" was written in the early

period of the development of capital market and before the

establishment of stock exchange. So Dr. Mahat made the first priority to

establish stock exchange for the development of stock market. He also

writes that Nepalese stock market is still in infancy stage and some

drawbacks to the development of stock markets are strong historical and

social reasons as well as mass poverty and illiteracy in Nepalese society.

He further points out that some conscious and educated people of urban

areas are also not investing in the industrial sector instead they are

investing on the real estate especially building construction. Although

the book is written in the early stage of the development of stock

market, the limitations of Nepalese society regarding the investment in

stock market is still reality of Nepalese Capital market.

Similarly the next book by Dr. R.S. Pradhan's is very valuable for the

purpose of analyzing the capital market in Nepal. In his book he writes

about the Stock Market behaviour in Nepal that “A number of studies

have been conducted on the stock market behaviour in developed and

big capital markets but their relevance is yet to be seen in the context of

smaller and underdeveloped capital markets.”(Pradhan, 1994: 42-43). As

per the book, the stock market behaviour in smaller and underdeveloped

capital markets is thus one of the important areas of the study in

finance. Information on stock market behaviour in such smaller and

underdeveloped capital markets would help development of realistic

theoretical models and formulation of relevant hypotheses for empirical

testing in finance. Thus it is felt necessary to study stock market

behaviour in the context of smaller and under-developed capital

33

markets, and this chapter prepared with reference to Nepal is a small

attempt towards that end.

"In Nepal, the listing of shares in Stock Exchange Center (SEC) and their

trading in the stock market is a recent phenomenon. The Nepalese stock

market is characterized by low trading volume, absence of professional

brokers, early stage of growth, limited movement of share prices, and

limited information available to investors. A number of researchers are

available on government owned public enterprises but researches on

enterprises whose stocks are listed in SEC and traded in stock market

are yet to come up in Nepal. Viewed in this way, this chapter is expected

to provide at least some insights into stock market behaviour in Nepal.

This chapter can be considered important, as Nepal has already started

the process of privatization of public or government owned enterprises."

(ibid)

Among the various empirical contradictions to the Asset Pricing Model of

Sharpe(1964), Linter (1965), and Black(1972), the most prominent is the

size effect of Banz(1981). He finds that average returns on large stocks

are lower while average returns on small stocks are higher. The positive

relation between leverage and average returns on US stocks and a

firm’s book value of common equity to its market value is documented

by Stattman (1980) and Rosenberg, Reid, and Lanstein (1985). Similarly,

Chan Hamao, and Lakonishok (1991) find the strong role of book-to

market equity in explaining the cross-section of average returns on

Japanese stocks. Basu (1983) also finds earnings-price ratio is explaining

the cross-section of average returns on US stocks. Again, Ball (1978)

finds that earnings price relation is likely to be higher for stocks with

higher risks and expected returns. Though there are these findings in the

context of developed and big capital markets, their applicability is yet to

be seen in the context of smaller under-developed capital markets. This

chapter therefore attempts to assess some of the cross-section

behaviour of stock market similar to ones as described above in the

context of Nepal. In an attempt to assess the stock market behaviour in

34

Nepal, it specifically examines the relationship of market equity, market

value to book value, price earning and dividends with liquidity,

profitability, leverage, assets turnover and interest coverage.

In the book, "Shareholder's Democracy and AGM feedback" Prof.

Manohar Kumar Shrestha has focused various issues related to

protection of shareholder's expectation. Success of companies directly

depends on the protection of their owners. But how can this be

accomplished is main question. Thus it is necessary to develop a

possible guidance for enhancing the efficiency for public limited

companies to contribute directly in the growth of national economy on

one hand and ensuring handsome return to the shareholders on the

other hand to maid their investment meaningful and worthwhile. At

present, the overall shareholders' democracy in terms of protection their

interest is basically focused on the payment of satisfactory dividend and

the maximization of shareholders' wealth by appreciating the value of

shares they sold. (Shrestha, 1999: 25)

“Investors were enlightened and they stated inquiring about company’s

financial health and future prospect before buying or selling shares.

People turned to price-earning multiples: NEPSE indexes informed trading

became sort of a norm when stock market entered 1995. Many who could

not cope e\with the system of intelligent speculation left the ground. As a

result, the numbers of buyers gradually came down and so did the

prices.”(The Kathmandu Post, May 18,1996: 6)

Panta, Rekha analyzed in her study, "Current status of share market in

Nepal", the trend of Nepalese stock market and present state of primary

and secondary market was found satisfactory. According to her study,

the development of stock market primarily depends on program and

their implementation. In Nepal, the overall policy environment has not

been conducted to the development of stock market. Therefore, it is

difficult to develop more efficient secondary market, trading system for

both equity and debt securities.

35

Capital Market is a crucial element in the national economy. Its role in

reinvigorating and boosting the economic activity in the country holds

significant. The strategic plan released by securities board can, to a

great extent, energize the investors, dealers by increasing investor

interest in it. Security market experiences both boom and boast soon

after the beginning of securities trading through brokers' member in the

stock exchange floor. Through the market started to function quickly

boosting the price of share to an unexpected level, it could not sustained

(Business age, 1999: 10).

“Return from investment in stock is not short run phenomenon.” Investors

have to learn few things before they make investment on stock. First of all

they should know the financial health of that company. For example; if

somebody want to invest in the share of Standard Charted Bank, he/she

must see its balance sheet or at least paid-up capital, last year net profit,

current year anticipated profit and calculate earning per share and price

earning per share and price earnings ratio. These two numbers would give a

fair idea about company health and then market price would judged through

the discount factors based upon one of the sound company’s data. Market

price is equal to earning per share divided by discount factor. EPS can

derived by dividing total net profit after tax by total number of shares and

price earning ratio by dividing market price per share by EPS. Lower the P/E

ratio higher the chance of profit with capital gain and others.” (Business

age, 2001: 20)

“Investment in share has traditionally been done by rating the institutions

on the price of price earning ratio or dividend. Hardly do investors

compare current assets with current liabilities or take a look at the debt

equity ratio. Unless investors begin analyzing the intricate financial

details of corporate institutions before making investment decision, the

market cannot develop smoothly.

Share investment has traditionally been guided by the investors return.

Most earning of investor here have been in the form of dividends rather

than capital gains, though high dividends are often seen, incorporate

36

finance theory as a wasteful use of scares capital. With the commercial

bank becoming the only potential destination, other stocks market

participants hardly making profit, and even they did failing to meet

investors expectations, demand for shares of commercial banks outpaced

supply and their price boomed.

Now the latest slums in the secondary market, despite a pretty good

performance by commercial banks, make it more apparent that

investment in the past was done on whim. Even officials at the stock

exchange and the securities board, refuting investors’ allegations of the

market manipulation and insiders’ trading of last February, discreetly

claimed that the Nepalese stock market is in a nascent stage. And that,

investment are made more on an impulse, rather than through market

study and credit rating.”(Business age 2001:25)

“ADB experts have seen many obstacles to the growth of the capital

market. This includes low level of investors' confidence, disclosure of poor

and manipulated financial information weak enforcement of regulation

absence of instructional investors, lack of diversity in the range of

financial instruments and the scope of active participation for the various

intermediaries limited by vertical barriers.”(The Rising Nepal, 2001: 7).

2.4 Review of Unpublished Masters' Degree Thesis:

There are many masters' thesis prepared by various researcher in the

subsequent previous years. Among them some thesis are reviewed here

for analysis of literature.

On the study of Mr. Bharat Prasad Bhatta, he focused that, resource

mobilization has a vital role in the developing economy like Nepal. The

development of the Stock market is a must for the resource mobilization.

There are various problems of Nepalese Stock market, which have

checked the resource mobilization in the economy. In his research work,

"Dynamic of Stock Market in Nepal" Mr.Bhatta set the following

objectives and followed by the some recommendation too which is given

below:

37

To analyze the trend of the Nepalese stock market.

To diagnose and compare the sectoral financial status of the stock

in Nepalese stock market

To analyze the market share prices of the Nepalese stock market.

To find out the impact of the secondary or primary market and vice

versa.

According to the above objectives "Mr. Bhatta recommended the

following points by his recommendation and conclusion section:

The government should make not only policies for the capital

market development but also implement these policies

appropriately.

Investment in corporate sector should be encouraged and their

share should be listed in the stock exchange.

The regulatory authorities of the stock market should cerate an

environment to rise the trading of share in the stock exchange.

The government should make appropriate policies and

programs for the enhancement of the entrepreneurship

development in the Nepalese economy.

In his conclusion he try to show that although it has become late to take

steps to overcome such problems of the Nepalese stock market in order

to make it active and supportive, the stock market has a good prospect

for the resource mobilization to finance the productive enterprises in the

Nepalese economy.

Likewise the main objectives of the dissertation prepared by Mr.

Khagendra Prasad Ojha, entitled "Financial Performance and Common

stock pricing" at 2000 were:

To study and examine the difference of financial performance and

stock price.

To examine the relationship of dividend and stock price.

To explore the signaling effect on stock price.

The findings presented on behalf of the given objectives were:

38

Nepalese stock market is in infancy stage. In general it is very new

and just started to develop.

Dominance of banking sector is prevalent in the market due to

other industries including finance -companies, insurance and

manufacturing is not encouraging.

Due to the lack of the proper investment opportunity most of the

investors have directed their savings towards the secondary stock

market.

Corporate firm with long history have a relatively stable

profitability parameters than the firm established after the

economize liberalization of 1990.

Older firms have been issuing bonus share more times than the

new one

Dividend per share is relatively more stable than dividend pay out

ratio. That’s why pay out ratio and dividend yield has been highly

fluctuating.

There is significant positive correlation between the dividend paid

and stock prices of banking and manufacturing industries. All other

industries have not the perfect correlation between the dividend

paid and stock prizes.

The study done by Mr. Ojha denotes that Nepalese stock market is still in

developing stage. Some corporate firms with long history have relatively

stable profitable parameters then that of the newly established firms.

Similarly dividend pay out ratio and dividend yield is more fluctuating

and there is positive relationship between dividend and stock price of

the firms. However it may be affected due to the change in time period

and other constraints at present.

“Mr. Mukti Pd. Aryal (1995) has conducted research on ‘The General

Behavior of stock Market Prices’.

The objectives of the study were;

To discuss theoretically the movements of stock market prices as

predicted by the random walk model;

39

To develop the empirical probability distribution of successive price

changes of an individual common stock and a stock market as a

whole;

To examine whether the successive price changes of stock market are

independent to each other or not?

He used the 21 stock (common) out of listed companies in Nepal Stock

Exchange through the study consists of daily closing prices for almost 8

months period.

He used the serial correlation test and run test as Test Methodology:

Serial Correlation Test: He applied serial correlation to test whether

the price changes of shares are independent to each other. For this

purpose he computed the serial correlation of 1-5 lag days applying the

natural logarithm model for daily price changes.

Runs Test: In order to test the random walk model he also applied run

tests. He analyzed runs by total numbers of expected runs, runs by signs

and runs by length.

The major findings and conclusion of the study are as follows:

He found average correlation of 0.102, 0.109, 0.088, 0.045 and 0.04 of

1,2,3,4 & 5 lag days respectively. The results of estimated co-efficient of

serial correlation were quite large and average estimates of co-efficient

were substantially positive in most of cases except of few individual

cases. And the results of runs test were also consistence with the results

of serial correlation tests. Results of the findings, he concluded,” the

stock price changes can be explained as serially positive dependent to

each other as an adequate description of reality i.e., today’s price

changes of an individual common stock is not as unbiased and

independent outcomes of yesterday price changes of Bernoulli

process.”(Aryal, 1995: 103)

On the research paper on," Stock Market Behaviour of Listed Joint

Venture Company in Nepal” conducted by Mr. Bachhu Ram Dahal

describes the stock market as the back bone of the country. Further he

40

set the main objective of his study was to study, examine and analyze

the stock market behavior. Specifically the objectives were:

To study and analyze stock price trend and volume of stock traded

on the secondary market.

To study and analyze the rate of listing of new companies and

maintenance of listed company in Nepal Stock Exchange Ltd.

To study and analyze the investors views regarding the decision on

stock investment.

To study and examine the signaling factors' impact on stock price

with the help of NEPSE index.

To suggest the abstract to the interested parties related to stock

market.

In his conclusion Mr. Dahal says that Stock Market is the backbone of

investment sector of the country. So by promoting the stock market in

sizeable economic sector raise the economic development by mobilizing

swing into productive sectors by making suitable investment for making

suitable investment environment different elements like price trend

NEPSE index, volume of stock traded, rate of listing. Signaling factors

should be analyzed.

Stock market was not properly analyzed for smooth operation of

secondary market. It shows gap between theory and practice of

investment. In Nepalese stock market the study of market behavior is a

very useful subject matter if properly analyzes for the development of

stock market.

Nepal stock exchange limited is analyzing stock market behavior in very

little area regarding the stock market. So experts should be recruited

and analyzed market behavior in efficient way so that all parties

interested with stock market can get benefit from this. The data analysis

showed that Nepal stock exchange is not providing facilities for investors

such as general awareness about investment, investment procedure for

general public and movement of stock trend in different periods and

their cause are not explained. Most of the investors are complaining that

41

the market makers, brokers, and NEPSES staffs are making coalition for

fraudulent activities towards investors. So NEPSE should clear this type

of charge for the development of stock market.

The role of market players in the market should made effective in

promoting capital market on the country by giving proper training and

adopting changes environment with modern tools and technique.

Investment is the lifeblood of economic development. It is evident that

stock exchange will continue to fulfill their vital functions in the national

economy. So long as private enterprises exist, we know that the stock

exchange is the place where stock and shares are bought and sold. The

substantial competition in innumerable buyer and seller determines the

prices with a measure of precision that cannot be obtained in other

unorganized market. So, stock market is the properly market for the

development of the national economy.

The development of stock market in Nepal is both challenging and

difficult. Though the viewpoint of share transition, public interest towards

stock market, the trend of the price movement, information system etc

indicates the low performance of stock market. The problem like lack of

strong professional analysis, independent buyer and seller, well trained

manpower and management delay in transfer of shares, rational investor

exist from the Nepalese stock market. Moreover there are many other

attraction that stock market able to attract the new generation toward it.

Stock market will be the strong market for the unemployed young

generation to build their career in capital market; i.e. it has lots of

prospects of development.

From Dahal’s study it seems that no comprehensive research has been

conducted in relation to the development of stock market in Nepal,

major problems facing by Nepalese stock market and expectation of

future growth. Thus, the stock market further requires timely research to

explore details of the problem and prospects of stock market in Nepal.

42

Mr. Sadakar Timilsina (1997) has conducted research on “Dividend and

Stock Price”

The study was carried out by the data for 16 enterprises from 1900 to

1994.

The main objectives of that study were as follows:

To test the difference between dividend per share and stock prices

To determine the impact of dividend policy on stock price.

To identify whether it is possible to increase the market value of

the stock changing dividend policy or payout ratio.

To explain the price behavior, the study used simultaneous equation

model as developed by Friend and Puckett (1964). The main findings of

that study were as follows:

The difference between dividend per share and stock prices is

positive in the sample companies.

Dividend per share affects the share prices variedly in different

sectors.

Changing the dividend policy or dividend per share might help

to increase the market price of share.

The difference between stock prices and retained earnings per

share is not prominent.

The difference between stock prices and lagged earnings ratio is

negative.

Though there were above-mentioned studies in the context of

Nepal, it has overcome necessary to find out whether their

findings are still valid.

Tililsina’s study was based on 45 observations. The number of companies

included in the same was only 16, which is quite low. Studies on

dividends conducted in the context of Nepal are based on Secondary data

only. No study has been conducted on dividends by using primary data as

yet. There is a need to conduct is survey of financial executives in order

to find out more qualitative facts on dividends which can not be

determined through the use of secondary data. This is the first attempt

that studies dividends based on questionnaire survey. Moreover, the

43

earlier studies on dividends have become old and need to be update and

validated because of the rapid changes taking place in financial market of

Nepal.

Mr. Surya Chandra Shrestha (1999) has conducted research on ‘Stock

Price Behavior in Nepal’, this study aims to examine the efficiency of the

stock market in Nepal.

The objectives of the study were:

To examine the serial correlation of successive daily price changes

of the individuals stocks.

To determine whether the sequence of price changes is consistent

with changes of the series of random numbers expected under the

independent Bernoulli process.

To determine the efficiency of the stock market through the

theoretical model of efficient market hypothesis in the Nepalese

stock market.

To provide feedback policy towards institutional development of

efficient market.

He used the data considering the daily closing price of 30 listed

companies’ shares (ordinary) in the NEPSE. His study period was consists

of almost hour and half years. He used the as serial correlation test and

run test as Test Methodology.

Serial Correlation Test: He applied serial correlation to test the stock

price behavior of Nepal Stock Exchange by giving sight in whether the

price changes of shares are independent to each other. For this purpose

he computed the serial correlation of 1-15 lag days applying the natural

logarithm model for daily price changes.

Run Test: He also, In order to test independence of stock prices, applied

runs test. He analyzed runs by total numbers of expected runs and runs

signs.

The major findings and conclusions drawn on this study were:

44

After applying the required models and methodologies he found average

correlation coefficient of 0.2055, 0.0825, 0.0704 for 1,2 and 3 lag days

respectively. And for lags 5 to 15 days were less than 0.07. In overall,

large number of serial correlation coefficients of the log price changes of

the 30 stocks for the sample periods are significantly departed from zero.

In addition runs analysis also followed the serial correlation results that

mean there has significant difference between actual numbers of runs for

series of daily closing prices changes of the market. By the results of his

applied models and methodologies he concluded,” the successive price

changes are not independent random variable for the 30 sample stocks

listed in the NEPSE. Therefore, the random walk theory is not suitable

description for the stock market price behavior in Nepal.

By the study of Mr. Shrestha, large number of serial correlation

coefficients of the log price changes of the 30 stocks for the sample

periods is significantly departed from zero. In addition runs analysis also

followed the serial correlation result that means there has significant

difference between actual numbers of runs for series of daily closing

prices changes of the market. In the study Mr. Shrestha has applied for

technical analysis only to get the result of share price behavior and he

has not used any fundamental tools for analysis.

From the above all studies conducted by various researchers, it seems

that Nepalese stock market is still in developing stage and it is facing

various challenges. Further more it also shows that there are very few

research works conducted about the market price behaviour on the stock

market. Most of the above stated studies use technical methods and

statistical methods like run test, correlation coefficient, NEPSE trend etc

for the analysis purpose. Only few of the studies use fundamental

analysis tools for the research work. More than that none of the studies

are concerned about the financial indicators like EPS, DPS and NWPS

which are the most influencing factors for the MPS. So, this study tries to

analyze the relationship of these factors with the pricing behaviour of the

stock of selected companies as well as it also tries to show the influence

45

of the important events happened in the country on market price of the

stock.

46

CHAPTER - 3RESEARCH METHODOLOGY

Research means to search again and again. We study the social

problem again and again to find out the something more about the

phenomenon. The first look may not be adequate. It prone to error, we

enter in to the subject matter again and again and study the problems

differently and thoroughly each time. This process is called research.

Research is a systematic and organized effort to investigate a specific

problem that needs solution.

Methodology refers the various steps that are generally adopted by a

researcher in studying his research problem along with the logic behind

it. Thus, Research methodology is a way to systematically solve the

research problem, what we are doing at present.

In this chapter, Research Methodology, we deal mainly with the method,

which are used in the period of research. In this regard, this chapter

explains not only talk of the research methods but also consider the logic

behind the methods, which are used in the context of our research

study. So, research design, sources of data and uses of statistical and

financial tools are basically explained in this chapter.

To draw inferences on the market performance of stock market and price

formation, different measure have been used, while collecting and

interpreting relevant data, facts and figures with a view to systematic

data collection and data's interpretation. Simple statistical tools have

been used to finish this research works, which represent the explanatory

and descriptive analysis of the relevant information and data.

Both descriptive and analytical types of research are employed to fulfill

the objective of research work. Primary sources of data as questionnaire,

interview with officials are used to find out the public awareness

regarding the investment in the shares, their risks and return and pricing

of shares of the selected companies listed in the stock exchange.

47

3.1 Research Design:

Research design is the organized way of research methods or

techniques used through the entire study. It is an integrated system that

guides the researcher in formulating, implementing, and controlling the

study. "Research Design is a plan, structure and strategy of investigation

conceived so as to obtain answer to research question and to control

variances", (Kothari, 1991: 24).The present study is basically related

with the Nepalese stock market and the share price behavior of the

selected listed companies. The study will explore the collection of data,

tabulation and compilation of data, computation of compiled data and

financial parameters, findings, conclusion and recommendations. To

analyze the past phenomena historical research design has been used.

Similarly to access the opinion, behavior or characteristics of a given

population and to describe the situation and events occurring at present,

descriptive research design has been used. In the same way, to analyze

the significant relation between MPS on EPS, DPS, NWPS various

statistical tools has been used under the phenomena of quantitative

research design. The research design is thus an integrated frame that

guides the researcher in planning and executing the research works.

3.2 Universe and Sample:

The analysis of stock market of the selected banking, financial and

insurance companies and their pricing behaviour largely depends on the

number of such companies listed in the Nepal Stock Exchange (NEPSE)

and share issuance by these companies. More over that share price will

be infected by the supply and demand and the supply and demand of

such shares depends upon the information available in the market.

Therefore, all the banking, financial and insurance companies listed in

the Nepal Stock Exchange and information regarding these companies

are taken as the total population. Due to the low volume and amount of

48

share transaction and insufficient data, other sectors like Mfg. sector,

service sector and others sectors have been neglected while taking the

sampling companies from the listed companies in Nepal Stock Exchange.

The samples will be taken using stratified as follows:

Table: 3.1 : Sampling ProcedureS

NoSector No of

Company

Listed

No of Sample compani

es

Percentage

Sample Companies

1 Commercial Bank

11 5 45% Nepal Arab Bank LtdStandard Chartered BankHimalayan BankNepal Bangladesh BankEverest Bank

2 Finance Companies

35 3 9% Annapurna FinancePeoples FinanceUniversal Finance

3 Insurance Companies

13 2 16% Himalayan InsuranceEverest Insurance

3.3 Sampling Procedure

For the research work only 10 companies has been taken as sampling

companies out of total population. Out of them 5 from commercial

banks, which covers 45% of total listed commercial banks sector, 3 from

finance companies, which covers 9% of total listed finance companies

sector and remaining 2, which covers 16% of total listed insurance

companies. Out of 11 listed commercial bank, 5 commercial banks (45%)

has been taken as sample companies which covers the 50% weighted on

total sample companies. Due to the high volume of share transactions

and business volume as well as more contribution to the economy in the

financial sectors in comparison to others more percentage i.e. 50%

weighted has been given to this banking sector while taking the

sampling companies. In the same way 3 finance companies and 2

insurance companies have been taken as sample companies out of total

listed companies on respective sector.

49

3.4 Sources of Data

The main source for the data collection was the central office of Nepal

Stock Exchange (NEPSE), Securities Boards office, Thapatali, Kathmandu

and economic survey published by Ministry of Finance. The main source

of data is annual report of the SEBO/N. Besides annual report various

bulletin available, journals, articles and other publications published by

different financial intuitions and other useful resources are also taken

into consideration. The research is mainly based on secondary data. The

required data will be collected through the corporate office of the

security board Nepal (SEBO/N)

Primary Data: Primary data will be collected through questionnaire and

direct interview of the concerned person in the office.

Secondary Data: The secondary source of data will be the annual

report of the Security Board Nepal, different books from library,

periodicals, newspaper cuttings, company's magazines etc. Guidelines

and unpublished thesis, Research work that directly related to financial

performance and stock market would form secondary data for the

purpose of this study. Significant information will also be collected from

Internet and various web- sites like www.nepalstock.com ,

www.sebonp.com , www.nrb.org.np etc.

3.5 Data Collection Procedure:

As the study was based on primary as well as secondary data,

information are collected by annual report published by Securities Board

Nepal (SEBO/N), Trading Index published by NEPSE, Economic Survey,

2002 published by Ministry of Finance and different monthly, quarterly,

half-yearly and yearly bulletins published by Nepal Rastra Bank.

Similarly, the annual reports of selected banking, finance and insurance

companies were the major source to get various data about the related

company.

For collecting primary data a set of questionnaire was prepared and

distributed to the investors. The questionnaire was consisted of objective

50

questions like multiple choice questions and yes / no questions. These

questions are related to the Stock market, public view toward the

investment in the stock, their prices and their reaction in the information

available in the market about the stocks of related companies. To get

reliable information, discussions were also conducted with investors,

NEPSE staff and other related parties with stock market.

3.6 Data Processing Procedure:

Data collected from questionnaires were in raw form. They were

classified and tabulated in the required format and presented in bar and

pie diagrams. Data collected from secondary sources were analyzed

through various financial and statistical tools. Major findings were based

on the analysis and interpretation of data.

Data Analysis Tools:

i) Financial Tools:

a) Capitalization of Earnings:

EPS ratio is used to measure the profitability of a firm from the owner’s view point. In

this model the market value of shares of a company is dependent of the earnings of the

company. The rate of earning or the earning per share is capitalized by normal rate of

return in order to measure the present market value of the equity share. The market

value of equity share is the capitalized value of the earning per share of a company at

the cost of equity (Ke). Hence,

Where, P0 = Expected market value of an equity

EPS = Earning per share

Ke = Cost of capital

b) Capitalization of Dividends:

Dividend refers the percentage of earnings paid in cash to its stockholders. "As long as

there are investment projects with returns exceeding those that are required, it will use

retained earnings and the amount of senior firm has retained earnings left over after

51

financing all acceptable investment opportunities, these earnings then would be

distributed to stockholders in the form of cash dividends. If not there would be no

dividends." (Van Horne, 1990; 328). People make investment in stock because they will

get dividend in return. Therefore, the price they are willing to pay will depend on their

expectations of dividends. Under this model, future streams of cash dividends are to be

evaluated and discounted by the cost of equity(Ke). Hence, the value of an equity share

is the present value of all future streams of cash dividends an investor expects to

receive, according to this model. (Timilsina, 2001; 20)

Where,

P0= present market value of an equity,

Ke= The required rate of return for equity

Dt= Expected future dividend at each future date t.

c) Risk Free Rate (Rf):

The risk free rate has been taken from Nepal Rastra Bank (NRB) for

different years based on the 91 days Treasury bills issued by NRB

which are as follows:

Table: 3.2 : Risk Free RateFiscal Year Average Risk free

Rate

1997/98 3.5037

1998/99 2.1222

1999/00 4.5812

2000/01 4.9535

2001/02 4.7171

d) Rate of Return on Common Stock (Rj) :

Rate of return on common stock can be defined as the change in value plus any cash

distribution expressed as a percent of the beginning of period investment value. An

investor can obtain two kinds of income from an investment in a share of stock : income

from price appreciation or losses from depreciation and income from cash dividend.

The rate of return on common stock can be expressed in percentage as follows:

52

Rate of return=

Where, Pt=Ending stock price

Pt-1=Starting Stock price

Dt=Cash dividend for time t

e) Required Rate of Return (R):

Required rate of return is calculated as the risk free rate plus the risk premium on the

risk of the particular stock. Total risk contains two parts diversifiable or unsystematic

risk and undiversifiable or systematic risk. Under the assumption of CAPM, investors

are not compensated for total risk, rather they are compensated in the market for facing

the systematic risk. According to the CAPM the required rate of return on any stock is

equal to the risk free rate of return plus market risk premium times stock beta.

R=Rf+(E(Rm)-Rf) βj

where, R=required rate of return on stock j.Rf=risk free rate of return

E(Rm)=market return or average return

βj=beta coefficient of stock j.

f) Market Return (E(Rm)):

Market return is the average return of the stocks of all companies in a industry. For this

research purpose, market return has been calculated by dividing the difference of this

year's market index and previous years market index by previous year's market index.

Thus,

E(Rm)=

ii) Statistical Tools:

a) Mean :

Mean of a set of observations is the sum of all the observations divided by the

number of observations.

b) Standard Deviation :

It is a quantitative measure of the total risk of assets. It provides more information

about the risk of the asset. It is a measure of the total risk of the asset. It measures

53

the dispersion of returns around the mean. Its advantage is that the uncertainty of

returns can be summarized into a single easily calculated number. The standard

deviation of a distribution is the square root of the variance of returns around the

mean.

Where, is return on asset A.

E( ) is expected return on assets A

c) Coefficient of Variation :

The risk per unit of expected return can be measured by the coefficient of variation,

which is computed as follows:

d) Karl Pearson’s Coefficient of Correlation:

It is a statitistical tool for measuring the intensity or magnitude of linear relationship

between the two variables series Karl Pearson’s measure, known as Personian

correlation coefficient between two variables (series) X and Y, usually denoted by

‘r(x,y)’ or rxy or simply ‘r’ can be denoted as

Where, n = number of observation in series X and Y;

∑X = Sum of observations in series X;

∑Y = Sum of observations in series Y;

∑X2 = Sum of squared observations in series X;

∑Y2 = Sum of squared observations in series Y;

∑XY = Sum of the product of observations in series X and Y;

The value of the correlation coefficient ‘r’ lies between -1 to 1 that is -1 ≤ r ≤ 1.

If r=1; there is perfect positive relationship and if r=-1 there is perfect negative

relationship or if r=0 then there is no relation at all.

“The closer the value of ‘r’ is 1 or -1, the closer the relationship between the

variables and the closer ‘r’ is to 0 the less close relationship. (Shrestha and

Manandhar, 1999:234)

54

e) Multiple Regression Analysis:

Regression analysis means the estimation or prediction of the unknown value of one

variable from the known value or variable. It is a mathematical measure of the

average relationship between two or more variables in terms of the original units of

the data. In regression analysis, there are two types of variables. The variable whose

value is influenced or is to be predicted is called dependent variable and the variable

which influences the values or is used for prediction, is called independent variable.

(Gupta, 1999:298)

The multiple regression equation is MPS=a+b1.EPS+b2.DPS + b3.NWPS

Where, MPS=Market Price per Share (Dependent Variable)

a= Regression constant

b1, b2, b3= Coefficients of independent variables

EPS, DPS, NWPS= Independent variables

f) Tools for Testing of Hypothesis (Paired T-test)

Paired t-test has been used as statistical tool to test null hypothesis. For the test of

hypothesis 10 NEPSE index before, after and during the major events has been

considered. The following working formula for t-test has been calculated and

interpreted as below:

Where, t = pared t-test

s =Standard error

n = Number of Observations

= Difference between two data

Application of Computer Software:

To fulfill the study the data has procured and finalized by using correlation coefficient,

valuation of stock, questioner analysis with the help of Micro Soft Excel and multiple

regression analysis and t-test have been performed on SPSS (Statistical Program for Social

Science). The result getting form this software has been presented in annex and the relevant

information are extracted and filled up where ever needed.

55

56

CHAPTER – 4STOCK MARKET IN NEPAL

The concept of stock market in Nepal is not very old. It is still in infancy

stage though it was begun with the floatation of shares by Nepal Bank

Limited and Biratnagar Jute Mill Limited (BJM) in 1937 under the

company act 1936. At that time, the participation on the ownership

structure of the corporate sector was restricted mostly to the Rana

family; consequently, the expansion of the capital market to the desired

level had been made in eighth five year plan to reform the capital

market. The establishment of Securities Exchange Center (SEC) in 1976

was the first and most important attempt made by the government to

develop the stock market. It was established with the objective of

facilitating and promoting the growth of capital market. Before

conversion in to Nepal Stock Exchange (NEPSE) it was the only capital

markets institutions undertaking the job of brokering, underwriting,

managing public issue, market making for government bonds and other

financial services. His majesty's government, under a program initiated

to reform capital markets converted securities exchange center in to

Nepal Stock Exchange in 1993 (Kharel, 2002 :67).

Initially, the SEC limited function for trading the government bonds and

national saving certificates only. Then it acts as an issue manager for

corporate securities and started to list and provides market for the

corporate stocks from fiscal year 1984/85 under the Securities Exchange

Act 1983. Thus, the SEC served to promote the primary as well as

secondary market for government and corporate securities from fiscal

year 1984/85. The incorporation of the Securities Board, Nepal (SEBO/N)

under the portion of the Securities Exchange Act 1983, and conversion of

the SEC into the Nepal Stock Exchange under the government policy,

capital market reform had greatly contributed to the development of

primary as well as secondary market for the corporate securities. The

rise in stock price and the market liquidity for corporate securities were

observed immediately after the incorporation of (SEBO/N) and NEPSE for

57

one year only. This has positive and immediate impact on the primary

market. But after a year, again downward trend in the primary as well as

secondary market is observed and this phenomenon has been

continuing till end of 2001. After a year, again downward trend in the

stock market started and has been continuing till now. It was happen

due to the internal and external problem face by the country's capital

market. Although, the growth of stock market is high relative to the

growth of the economy, the share of corporate sector in the national

economy is still very low due to the negligible size of corporate sector.

In Nepal, NEPSE is the only official stock market where there are three

market makers, two securities dealer, twenty-seven brokers and ten-

issue manager to provide service of securities. Thus, the stock market in

Nepal is burning issue and is in its infancy stage also. Among all the

economical and financial market, the stock market is a pivotal institution

in the financial system of a country. The development of the stock

market depends largely on financial intimidation as well as on the

availability of a wide array of financial institution. Therefore stock market

development is partly a natural progression of the development of a

country's financial sector as long term economic growth proceeds. Thus,

the activities of buying and selling of shares on the stock are extremely

important for the allocation of capital with in economies and it requires

on in depth analysis.

4.1 Nepal Stock Exchange (NEPSE)

Securities Exchange Center was established with an objective of

facilitating and promoting the growth of capital markets. Before

conversion in to Nepal Stock Exchange (NEPSE) it was the only capital

markets institution undertaking the job of the brokering, underwriting,

managing public issue, market making for government bonds and other

financial services. His Majesty's Government under a program initiated

to reform capital markets converted Securities Exchange Center in to

Nepal Stock Exchange in 1993.

58

The basic objective of NEPSE is to impart the free marketability and

liquidity to the government and corporate security by facilitating

transaction in its trading floor through member, market intermediaries,

such as broker, market makers etc.

After the restoration of democracy in 1990, the interim government in its

short period has initiated banking reformation and has established

Citizen Investment Fund (CIF). The establishment of NIDC capital market

limited is also another major step to improve financial system in Nepal.

His majesty's Government, as an initiator to reform the capital market,

converted Securities Exchange Center into Nepal Stock Exchange

Limited (NEPSE). NEPSE is a non-profit organization, operating under

security exchange act 1983. NEPSE commenced its operation on 13th

January 1994, with ownership among His Majesty's Government, The

Nepal Rastra Bank (NRB) and Nepal Industrial Development Corporation

(NIDC) and its licensed members. The ownership of different members is

given below:

Table: 4.1 : Shareholders of NEPSES.NO

.

Shareholders Investment

(%)

1 HMG/N 52.55

2 NRB 39.72

3 NIDC 7.04

4 Other Members 0.69

Source: SEBON Annual Report 2001/02

The authorized capital of NEPSE is Rs.50 million and the issued capital is

Rs.30 million, of this 20.89 million is subscribed by HMG/N, NRB, NIDC

and Other Licensed members. The main objective of NEPSE is to upgrade

the infrastructure of the security exchange so that it could handle the

increased activity more efficiently. This has included a focus on the

modernization of the trading clearing settlement and surveillance

procedures. There are 27 industrial securities brokers, 10 issue

managers, 2 securities dealers and 1 market maker to smooth the daily

59

transaction of buying and selling of securities. (SEOBN-Annual Report,

2000/01: 7) The number of listed companies was 16 in1986 where as it

was 115 in 2001 but it is only 96 in 2002. NEPSE deleted some

companies' name from its list because of not performing rules and

regulation of capital market. But at the end of the fiscal year 2002/03

the total number of listed companies in NEPSE is 108. The value of listed

companies' shares has reached to RS.2344.16 million in 2001 but it is

Rs.1540.63 million in 2002. The market shows continues rise till 2001

but it is little down in year 2002.

In Nepal current market size of tradable security is small, with it

associated problems of stock availability and liquidity in order to develop

stock market, NEPSE is responsible for the regulatory functions under

the supervision of Security Board Nepal (SEBO/N).

The stock exchange provides an organized market place for the

investors to pay and sell securities freely. The market for these

securities is an almost perfectly competitive one because a large

number of sellers and buyers participate. In stock exchange, there is

active biding and two-way auction trading takes place. Since the buying

and purchasing activities are done through bargaining, the price of

securities is determined by the basic laws of supply and demand. The

stock exchange provides an auction market in which members of the

stock exchange participate to ensure continuity of the price and liquidity

to investors.

4.2 Securities Board Nepal (SEBO/N)

Securities Board, Nepal was established in May 26, 1993 under the

provision of Securities Exchange Act, 1983(first amendment). Since

its' establishment, SEBO has been concentrating its efforts to improve

the legal and statutory frameworks which are the bases for the

healthy development of the capital market. As a part of its continuous

effort to build a sound system, the Securities Exchange Act, 1983 was

amended for the second time on Jan 30, 1997. This amendment

paved the way for establishing SEBO as an apex regulatory body as it

60

widened the horizon of SEBO by bringing market intermediaries

directly under its jurisdiction and also made it mandatory for the

corporate bodies to report to SEBO annually as well as semi-annually

regarding their performance. Although the second amendment in the

act established direct relationship of SEBO with the market

intermediaries and the listed companies, supremacy in its jurisdiction

is yet to be established and clearly recognized.

In order to improve such a situation, SEBO focusing on the major

areas where improvement is necessary, has launched a four-year

Strategic Plan (1998-2002) with major thrust in four major policy

development areas. SEBO has also drafted a new Security and

Exchange Act, which has sought to improve inconsistencies observed

in the present act and establish SEBO as an apex regulator of the

securities market.

General objectives of SEBO:

i) To promote and protect the interest of the investors by

regulating the issuance, sale and distribution of securities and

purchase, sale or exchange of securities.

ii) To supervise, look after and monitor the activities of the stock

exchange and of corporate bodies carrying on securities

business.

iii) To render contribution to the development of capital market by

making securities transactions fair, healthy, efficient and

responsible

The main functions of SEBO are as follows:

i) To advise HMG on the issues related to development of

capital market and the protection of the investors' interest.

ii) To approve stock exchanges for the operation and oversee

them for healthy trading of securities.

iii) To register and regulate market intermediaries involved in

the primary issues as well as in the secondary trading of

securities.

61

iv) To regulate public issues of securities including the mutual

and trust funds.

v) To monitor and supervise the securities transactions.

vi) To conduct researches and studies along the area of capital

market.

vii) To conduct conferences, workshops, seminars, and

participate in such programs conducted at regional or

international level and join the forum and exchange with

outside regulators.

Governing Board, Staffing, and Funding of SEBO:

SEBO is governed by a Board, composed of seven members including

a chairman. The Chairman is appointed by His Majesty’s Government

of Nepal (HMG/N) for the tenure of four years. It is the Government's

prerogative to re-appoint the chairman, if necessary. Members of the

Board include representatives one each from Ministry of Finance,

Ministry of Law, Ministry of Industry, Nepal Rastra Bank (The Central

Bank), Federation of Nepalese Chamber of Commerce and Industry

and Nepal Chartered Accountants' Association.

At the end of the fiscal year 2001/2002 SEBO was manned altogether by

25 staffs including executives, officers and supervisory and support

staffs.

As a developing regulator of the capital market, SEBO is basically relying

on governments' financial assistance. In order to be a self-dependent

institution, it has created revolving fund from which it generates income

that helps to cover part of its expenses. Income from registration of

corporate securities and registration as well as renewal of market

intermediaries are its' other financial sources. (SEOBN-Annual Report,

2000/01: 2)

CHAPTER – 5PRESENTATION AND ANALYSIS

62

This chapter deals with data presentation, analysis and interpretation

following the research methodology presented in the third chapter. In

this course of analysis, data gathered from various sources have been

inserted in the tabular form. By using financial and statistical tools, the

data have been analyzed. The results of the copulation have also been

summarized in appropriate tables. The samples of computation of each

model have been included in annexes. Basically the following analyses

have been carried out:

Co-relation coefficient analysis

Multiple regression analysis

Calculation of required rate of return

Analysis of the primary data

Paired T-test analysis

5.1 Relationship of MPS with Various Financial

Indicators:

The relationship of MPS with various financial indicators like EPS, DPS,

NWPS and currently distributed dividend of previous year is evaluated

through two methods. The first one is calculation of correlation-

coefficient between EPS and observed MPS, DPS and observed MPS,

NWPS and observed MPS and currently distributed dividend and MPS.

Similarly the second is to derive multiple regression equation of EPS,

DPS and NWPS on MPS.

5.1.1 Co-relation Coefficient Analysis:

Co-relation coefficient is the best measures to evaluate and examine the

relationship between two variables. It showed the positive relation,

negative relation and no relation between two variables. For this

research purpose the five year (from 1997/98 to 2001/02) related data

are first gathered and tabulated and then correlation coefficient of MPS

with other financial indicators like EPS, DPS and NWPS is calculated for

the selected banking and financial companies. Similarly, as the previous

year’s dividend is distributed in the subsequent following year, the

relationship of MPS with previous year’s dividend (this year’s distributed

63

dividend) is also calculated. The following table summarizes the

correlation coefficient of MPS with EPS, DPS, NWPS and with the previous

years dividend or currently distributed dividend of the selected listed

banking, financial and insurance companies.

Table: 5.1Calculation of coefficient of co-relation between MPS and EPS, MPS and DPS, MPS and NWPS and MPS and last year’s DPS

S. No

Sector Name of the

Company

With EPS With DPS With NWPS

With Last

Year’s DPS

1

Banking

NABIL 0.63 0.06 0.64 -0.482 Standard

Chartered0.04 -0.21 -0.55 -0.29

3 Himalayan Bank

0.76 0.33 0.65 0.60

4 Nepal Bangladesh Bank

0.85 0.97 0.986 0.23

5 Everest Bank

0.78 0.71 0.34 0.60

7

Finance

Annapurna Finance

-0.26 0.25 0.06 0.61

8 Peoples Finance

0.61 No DPS 0.57 -0.46

9 Universal Finance

0.34 0.62 0.75 0.36

11

Insurance

Himalayan Insurance

0.95 0.85 0.74 0.90

12 Everest Insurance

0.85 0.90 0.83 0.85

The above table shows the correlation coefficient between MPS and

various financial indicators as EPS, DPS, NWPS and currently distributed

DPS of previous year.

Nepal Arab Bank Ltd (NABIL)

As per the above table, the correlation coefficients of MPS with EPS, DPS,

NWPS and previous year’s dividend of NABIL bank are 0.63, 0.06, 0.64

and -0.48 respectively. This means that market price of the stock of

NABIL bank during the study period was positively influenced by EPS,

DPS and NWPS. Similarly, the relationship is negative in case of previous

year’s dividend. Since the correlation coefficient of MPS with DPS is only

0.06, DPS has no significant relation in the movement of stock price of

NABIL bank. Although DPS should have a strong influence in the market

64

price, the result is different. The reasons behind such irrelevant result

could be sampling error or the collection of only five years data for the

study. Similarly, the result shows that distribution of dividend (previous

year’s dividend in current year) of NABIL bank has negative impact its

stock price. The calculation shows that NABIL bank’s stock price is more

influenced by NWPS then other financial indicators.

Standard Charted Bank Ltd. (SCB):

In case of Standard Charted Bank, the correlation coefficients of MPS on

EPS, DPS, NWPS and last year’s dividend are 0.04, -0.21, -0.55 and -0.29

respectively. This result indicates that the relation of MPS with EPS is

nearly zero or there is no relation between them. Similarly in case of

other financial indicators like DPS, NWPS and last year’s dividend, the

relationship with MPS is negative. Although, theoretically EPS, dividend

declaration and NWPS should have positive impact in MPS, the result

shows the negative relation because of the short study period of 5 years.

If more years’ data were collected and then correlation was calculated,

then the result may prove the theory.

Himalayan Bank Limited (HBL):

The market price of the stock of HBL has positive relation with its all

financial indicators like EPS, DPS, NWPS and last year’s dividend. As per

the calculation, the correlation coefficient of MPS of HBL with its EPS,

DPS, NWPS and last year’s dividend is 0.76, 0.33, 0.65 and 0.60

respectively. The result shows that the MPS of HBL is more affected by

EPS then other financial indicators. Similarly, DPS of HBL, among other

financial indicators, has least relationship with MPS.

Nepal Bangladesh Bank Ltd. (NBL):

If the EPS of a company is high then the demand for such company’s

stock is increased and thus the stock price would move forward in the

same line with EPS. Similarly, DPS and NWPS also should have same kind

of relation with MPS. This theoretical concept has been proved by the

calculation of correlation coefficient of MPS of NB bank with its EPS, DPS

and NWPS. 0.85, 0.97 and 0.986 is the value of correlation coefficient of

65

MPS of NB bank with its EPS, DPS and NWPS. It shows that the stock

price of NB bank has strong positive correlation with its EPS, DPS and

NWPS. While considering with the last year’s dividend, its correlation

coefficient with MPS is 0.23 which shows that last year’s dividend has

least impact in the stock price of NBL during the study period.

Everest Bank Ltd.:

As HBL and NB bank, the correlation of MPS of Everest Bank with its EPS,

DPS, NWPS and last year’s dividend is positive. The calculated result

shows that the correlation coefficient of MPS of Everest Bank with its

EPS, DPS, NWPS and last year’s dividend is 0.78, 0.71, 0.34 and 0.60

respectively. Among the four financial indicators, EPS and DPS has

strong positive relation with MPS of Everest Bank Although NWPS also

should have strong relationship with MPS as EPS and DPS, NWPS of

Everest Bank has least influence in the movement of stock price then

other financial indicators. Similarly, last year’s dividend has also

significant positive relation with MPS of Everest Bank Ltd.

Annapurna Finance Limited (AFL):

Due to the lack of data of 2001/02 of Annapurna Finance Co. only four

years data was studied and analyzed. The result states that the

correlation coefficient of MPS with EPS, DPS, NWPS and last year’s

dividend are -0.26, 0.25, 0.06 and 0.61 respectively. So, during the four

years study period, DPS, NWPS and last year’s dividend show positive

relation with MPS of the company whereas EPS shows negative

relationship. Although EPS, DPS and NWPS should have strong

relationship with MPS, the result shows that the change in EPS, DPS and

NWPS has no significant role or least role in the change of MPS of

Annapurna Finance Company. This irrelevant result occurred due to the

short study period.

Peoples Finance Limited (PFL):

66

Since People Finance has not declared any dividend during the five years

of the study period, it is not possible to compute co-relation coefficient of

DPS with MPS. But the correlation coefficient of MPS with EPS and NWPS

both are positive with last year’s dividend is negative. Numerically, the

correlation coefficient of MPS of Peoples Finance with its EPS, NWPS and

last year’s dividend is 0.61, 0.57 and -0.46 respectively. The correlation

of last year’s dividend with MPS is negative because only in the first year

of the study period, the stock holder of Peoples Finance get dividend and

for the remaining years the dividend was zero.

Universal Finance Limited (UFL):

The market price of the stock of Universal Finance has positive relation

with its all financial indicators like EPS, DPS, NWPS and last year’s

dividend. As per the calculation, the correlation coefficient of MPS of

Universal Finance with its EPS, DPS, NWPS and last year’s dividend are

0.34, 0.62, 0.75 and 0.36 respectively. The result shows that the MPS of

Universal Finance is more affected by NWPS then other financial

indicators and EPS has least relationship with MPS.

Himalayan Insurance:

The stock price of Himalayan Insurance Company moves in the same

direction as the EPS, DPS, NWPS and last year’s dividend moves because

the correlation coefficient between them is 0.95, 0.85, 0.74 and 0.90

respectively. This indicates that all the financial indicators have strong

positive relationship with MPS of Himalayan Insurance Company.

Moreover the EPS of the company has the most significant relationship

with MPS. This is because when the EPS of the company has increased,

the MPS has also increased and when EPS decreased the MPS has also

decreased.

Everest Insurance:

As Himalayan Insurance Company, the correlation of MPS of Everest

Insurance with its EPS, DPS, NWPS and last year’s dividend is positive.

The calculated result shows that the correlation coefficient of MPS of

Everest Insurance with its EPS, DPS, NWPS and last year’s dividend are

67

0.85, 0.90, 0.83 and 0.85 respectively. Although only four years’ data

were taken for the calculation of correlation coefficient of Everest

Insurance, all the four financial indicators, EPS, DPS, NWPS and last

year’s dividend have strong positive relation with MPS of Everest

Insurance Company. Such result occurs because all the four financial

indicators as well as MPS of Everest Insurance Company are in

increasing trend during the four years study period.

5.1.2 Multiple Regression Equation:

In multiple regression analysis two or more independent variables are

used to estimate the values of a dependent variable. In other words,

multiple regression analysis helps to establish the functional relationship

between more than two variables and thereby provides a mechanism for

estimation. However, multiple regression analysis is applied here in

order to analyze the combined effect of EPS, DPS, and NWPS on MPS of

the sampled companies.

Multiple Regression Equation for NABIL Bank:

MPS=a+b1.EPS+b2.DPS + b3.NWPS

Table: 5.2 Regression Coefficient for NABIL Bank.Descripti

ona1 b1 b2 b3 r2 S.E.E Significa

nt fCoefficient Values

3074.783 51.200 -19.992 -18.616 0.471

683.5199

0.836

Standard Error

23933.362

213.619

61.417 147.515

Significant -t

0.919 0.850 0.800 0.920

The above table summarized results of multiple regression analysis

produced by using SPSS software for determining the combined effect of

EPS, DPS and NWPS on MPS of NABIL bank for the five years study

period. The regression constant a1 of NABIL is 3074.783 which imply that

MPS does not go below that level even if EPS, DPS, and NWPS are

omitted from the model. The regression coefficient b1 represents that

one rupee increase in EPS leads to an average increase in MPS by 51.20

68

if the other two variables; DPS and NWPS are kept constant. However

the value of b1 may vary by rupees 213.619 as it explain by the standard

error of b1. Similarly, the regression coefficient b2 measures the average

effect of DPS on MPS. The value of b2 being -19.992 indicates that one

rupee increase in DPS leads to a decrease in MPS by Rs.19.992, holding

the two other variables constant. Like wise the coefficient b3 measures

the average effect of NWPS on MPS. The value of b3 which is equal to -

18.616 indicates that an average increase in NWPS by one rupee leads

to decrease in MPS by 18.616. The coefficient of determination r2

explains that 47.10% variation in MPS is accounted for by the variation in

EPS, DPS and NWPS and 52.90% variation in MPS is due to the other

irrelevant factors. The estimation of MPS might be inaccurate by

Rs.683.519 as the standard error of estimate. Similarly, the regression

model is statistically insignificant at 5% level of significance as the value

of significant f is 0.836 which is greater than 0.05.

Multiple Regression Equation for Standard Chartered Bank:

MPS=a+b1.EPS+b2.DPS + b3.NWPS

Table: 5.3 Regression Coefficient for Standard Chartered Bank.Descripti

ona1 b1 b2 b3 r2 S.E.E Significa

nt fCoefficient Values

-614.280 27.964 49.040

-18.094 0.932

285.0301

0.328

Standard Error

1479.431 14.273 22.156

5.135

Significant –t

0.749 0.300 0.270 0.176

As per the above table of Multiple Regression Analysis, produced by

SPSS software, a1, the regression constant SCB, is -614.280 which

implies that MPS does not go below that level even if the values of EPS,

DPS, and NWPS are zero. However negative MPS is ridiculous in practice.

The regression coefficient b1 represents that one rupee increase in EPS

leads to an average increase in MPS by 27.964 if the other two variables;

DPS and NWPS are kept constant. However the value of b1 may vary by

rupees14.273 as it explained by the standard error of b1. Similarly, the

regression coefficient b2 measures the average effect of DPS on MPS.

The value of b2 being -19.992 indicates that one rupee increase in DPS

69

leads to a decrease in MPS by Rs.19.992, holding the two other variables

constant. Like wise the coefficient b3 measures the average effect of

NWPS on MPS. The value of b3 which is equal to 49.040 indicates that an

average increase in NWPS by one rupee leads to increase in MPS by

49.040. The coefficient of determination r2 explains that 93.20%

variation in MPS is caused by the variation in EPS, DPS and NWPS

respectively, whereas 6.80% variation in MPS is due to the other

extraneous factors. The standard error of estimate of that model reveals

the fact that the estimation of MPS might vary by Rs.285.0301. Similarly,

the multiple relationship as explained by this model is statistically

insignificant at 5% level because significant value of F is 0.328 which is

greater than 0.05.

Multiple Regression Equation for Himalayan Bank ltd:

MPS=a+b1.EPS+b2.DPS + b3.NWPS

Table: 5.4 Regression Coefficient for Himalayan Bank.Description a1 b1 b2 b3 r2 S.E.E Significa

nt fCoefficient Values

-231.67 12.018 7.032 11.021 0.842

312.2416

0.492

Standard Error

1878.394

16.071 6.098 11.004

Significant –t 0.434 0.591 0.455 0.499

As shown in the above table, the regression constant a1 of HBL is -231.67

which implies that MPS does not go below that level even if the values of

EPS, DPS, and NWPS are zero. However negative MPS is ridiculous in

practice. The regression coefficient b1 represents that one rupee

increase in EPS leads to an average increase in MPS by 12.018 if the

other two variables; DPS and NWPS are kept constant. However the

value of b1 may vary by rupees16.071 as it explained by the standard

error of b1. Similarly, the regression coefficient b2 measures the average

effect of DPS on MPS. The value of b2 Rs.7.032 indicates that one rupee

increase in DPS leads to an increase in MPS by Rs.7.032, holding the two

other variables; EPS and NWPS are left constant. Like wise the coefficient

b3 measures the average effect of NWPS on MPS. The value of b3 which is

equal to 11.031 indicates that an average increase in NWPS by one

70

rupee leads to increase in MPS by 11.031. The coefficient of

determination r2 explains that 84.20% variation in MPS is caused by the

variation in EPS, DPS and NWPS respectively, whereas 15.80% variation

in MPS is due to the other extraneous factors. The standard error of

estimate of that model reveals that the estimation of MPS might vary by

Rs.312.2416 and as the significant F value is 0.49 which is more than

0.05, the relationship established by this model is insignificant at 5%

level.

Multiple Regression Equation for Nepal Bangladesh Bank Ltd:

MPS=a+b1.EPS+b2.DPS + b3.NWPS

Table: 5.5 Regression Coefficient for Nepal Bangladesh Bank.Descripti

ona1 b1 b2 b3 r2 S.E.E Significa

nt fCoefficient Values

-500.519 -2.509 2.957 6.120 0.977

152.1231

0.193

Standard Error

1141.380 5.154 12.406

6.508

Significant –t

0.737 0.712 0.851 0.520

The above table shows the summarized results of multiple regression

analysis produced by using SPSS software for determining the combined

effect of EPS, DPS and NWPS on MPS of NB Bank Ltd. for the five years

study period. The regression constant a1 of NB Bank is -500.519 which

implies that MPS does not go below that level even if EPS, DPS, and

NWPS are equal to zero. However negative MPS is ridiculous in practice.

The regression coefficient b1 represents that one rupee increase in EPS

leads to an average decrease in MPS by -2.509 if the other two variables;

DPS and NWPS are kept constant. However the value of b1 may vary by

rupees 5.154 as it explain by the standard error of b1. Similarly, the

regression coefficient b2 measures the average effect of DPS on MPS.

The value of b2, 2.957 indicates that one rupee increase in DPS leads to

an increase in MPS by Rs.2.957, by leaving the two other variables as

constant. Like wise the coefficient b3 measures the average effect of

NWPS on MPS. The value of b3 which is equal to 6.120 indicates that an

average increase in NWPS by one rupee leads to increase in MPS by

6.120. The coefficient of determination r2 explains that 97.70% variation

71

in MPS is accounted for by the variation in EPS, DPS and NWPS and

2.30% variation in MPS is due to the other irrelevant factors. The

estimation of MPS might be inaccurate by Rs.152.1321 as the standard

error of estimate. Similarly, the multiple relationship as explained by this

model is statistically insignificant at 5% level because significant value of

F is 0.19 which is greater than 0.05.

Multiple Regression Equation for Everest Bank Ltd:

MPS=a+b1.EPS+b2.DPS + b3.NWPS

Table: 5.6 Regression Coefficient for Everest Bank.Descripti

ona1 b1 b2 b3 r2 S.E.E Significa

nt fCoefficient Values

-376.684 54.336 5.263 -4.415 0.940

153.5893

0.309

Standard Error

341.375 22.116 4.029 3.105

Significant –t

0.469 0.246 0.416 0.390

The above table shows the outcomes of multiple regression analysis

produced by using SPSS software for determining the combined effect of

EPS, DPS and NWPS on MPS of Everest Bank Ltd. for the five years study

period. The regression constant a1 of EBL is -376.684 which implies that

MPS does not go below that level even if the values of EPS, DPS, and

NWPS are zero. However negative MPS is ridiculous in practice. The

regression coefficient b1 represents that one rupee increase in EPS leads

to an average increase in MPS by 54.336 if the other two variables; DPS

and NWPS are kept constant. However the value of b1 may vary by

rupees 22.116 as it explained by the standard error of b1. Similarly, the

regression coefficient b2 represents that one rupee increase in DPS leads

to an average increase in MPS by 5.263 if the other two variables; EPS

and NWPS are kept constant. Like wise the coefficient b3 measures the

average effect of NWPS on MPS. The value of b3; -4.415 indicates that an

average increase in NWPS by one rupee leads to decrease in MPS by

4.415. The coefficient of determination r2 explains that 94.00% variation

in MPS is caused by the variation in EPS, DPS and NWPS respectively,

whereas 6.00% variation in MPS is due to the other extraneous factors.

The standard error of estimate of that model reveals that fact that the

72

estimation of MPS might vary by Rs.153.5893. As the significant F value

is 0.309 which is more than 0.05, the relationship established by this

model for Everest Bank’s MPS is insignificant at 5% level.

Multiple Regression Equation for Annapurna Finance Ltd:

MPS=a+b1.EPS+b2.DPS + b3.NWPS

Table: 5.7 Regression Coefficient for Annapurna Finance.Descripti

ona1 b1 b2 b3 r2 S.E.E Significa

nt fCoefficient Values

232.917 -0.204 1.381 0.184 0.12 386.4574

0.982

Standard Error

2121.719 25.96 9.585 12.948

Significant –t

0.930 0.995 0.909 0.991

The above table shows the summarized results of multiple regression

analysis for determining the combined effect of EPS, DPS and NWPS on

MPS of Annapurna Finance Company Ltd. for the five years study period.

The regression constant a1 of Annapurna Finance is 232.917 which

implies that MPS does not go below that level even if EPS, DPS, and

NWPS are equal to zero. The regression coefficient -0.204 for b1

represents that one rupee increase in EPS leads to an average decrease

in MPS by Rs. 0.204 if the other two variables; DPS and NWPS are kept

constant. Generally EPS should have positive influence in MPS but the

result here derived shows the negative because of the short study

period. However the value of MPS caused by EPS may vary by rupees Rs.

25.96 as it explains by the standard error of b1. Similarly, the regression

coefficient b2 measures the average effect of DPS on MPS. The value of

b2, 1.381 indicates that one rupee increase in DPS leads to an increase in

MPS by Rs. 1.381, by leaving the two other variables as constant. Like

wise the coefficient b3 measures the average effect of NWPS on MPS. The

value of b3 which is equal to 0.184 indicates that an average increase in

NWPS by one rupee leads to increase in MPS by Rs. 0.184. However the

value of MPS may vary by Rs. 9.585 and Rs. 12.948 by the effect of DPS

73

and NWPS separately as the standard error of b2 and b3 shows it. The

coefficient of determination r2 explains that 12.00% variation in MPS is

accounted for by the variation in EPS, DPS and NWPS and 88% variation

in MPS is due to the other irrelevant factors. Similarly, the multiple

relationship as explained by this model is statistically insignificant at 5%

level because significant value of F is 0.98 which is greater than 0.05.

Multiple Regression Equation for Peoples Finance Ltd:

MPS=a+b1.EPS+b2.DPS + b3.NWPS

Table: 5.8 Regression Coefficient for Peoples Finance.Descripti

ona1 b1 b2 b3 r2 S.E.E Significa

nt fCoefficient Values

120.182 0.643 0.575 0.462

87.4083 0.538

Standard Error

96.714 0.897 0.977

Significant –t

0.340 0.548 0.616

The above table shows the outcomes of multiple regression analysis

produced by using SPSS software for determining the combined effect of

EPS, DPS and NWPS on MPS of Peoples Finance Company Ltd. for the five

years study period. The regression constant a1 of PFCL is 120.182 which

implies that MPS does not go below that level even if the values of EPS,

DPS, and NWPS are zero. The regression coefficient b1 represents that

one rupee increase in EPS leads to an average increase in MPS by 0.643

if the other two variables; DPS and NWPS are kept constant. However

the value of b1 may vary by rupees0.897 as due to the standard error of

b1. Similarly, the regression coefficient b2 measures the average effect of

DPS on MPS. Due to the non declaration of cash dividend during our

study period by the co. the effect of DPS on MPS could not explained and

left blank as above. Like wise the coefficient b3 measures the average

effect of NWPS on MPS. The value of b3 which is equal to 0.575 indicates

that an average increase in NWPS by one rupee leads to increase in MPS

74

by 0.575. Whereas it may vary by Rs. 0.977 due to the standard error

explained in b3. The coefficient of determination r2 explains that 46.20%

variation in MPS is caused by the variation in EPS, DPS and NWPS

respectively, whereas 53.80% variation in MPS is due to the other

extraneous factors. The standard error of estimate of that model reveals

that fact that the estimation of MPS might vary by Rs.87.4083. The

relationship explained by this model for Peoples Finance is insignificant

at level of 5% because the significant F value is 0.538 which is more

than 0.05.

Multiple Regression Equation for Universal Finance Ltd:

MPS=a+b1.EPS+b2.DPS + b3.NWPS

Table: 5.9 Regression Coefficient for Universal Finance.Description a1 b1 b2 b3 r2 S.E.E Significa

nt fCoefficient Values

139.828 -19.197 7.804 3.236 0.989

15.0772 0.134

Standard Error 44.387 3.123 1.476 0.552Significant -t 0.196 0.103 0.119 0.108As above table explains the multiple regression analysis to determine

the combine effect of EPS, DPS and NWPS on MPS computed by SPSS

software of Universal Finance Co. Ltd. during the five years study period.

The regression constant MPS (a1) of UFCL is 139.828 which implies that

MPS does not go below that level even if the values of EPS, DPS, and

NWPS are zero. The regression coefficient b1 represents that one rupee

increase in EPS leads to an average decrease in MPS by 19.197 if the

other two variables; DPS and NWPS are kept constant. However the

value of b1 may vary by rupees 3.123 as it explained by the standard

error of b1. Similarly, the regression coefficient b2 measures the average

effect of DPS on MPS. The value of b2, Rs.7.804 indicates that one rupee

increase in DPS leads to an increase in MPS by Rs.7.804, holding the two

other variables; EPS and NWPS are left constant. However the value of

DPS may vary by Rs.1.476 due to the standard error. Like wise, the

coefficient b3 measures the average effect of NWPS on MPS. The value of

b3, 3.236 indicates that an average increase in NWPS by one rupee leads

to increase in MPS by 3.236. The coefficient of determination r2 explains

75

that 98.90% variation in MPS is caused by the variation in EPS, DPS and

NWPS respectively, whereas 1.10% variation in MPS is due to the other

extraneous factors. The standard error of estimate of that model reveals

that the estimation of MPS might vary by Rs.15.0772. As the significant F

for the Universal Finance is 0.134, the relationship established by this

model is significant only on the level of 13.4% and it is insignificant at

the level of 5%.

Multiple Regression Equation for Himalayan General Insurance:

MPS=a+b1.EPS+b2.DPS + b3.NWPS

Table: 5.10 Regression Coefficient for Himalayan General Insurance.Description a1 b1 b2 b3 r2 S.E.E Significa

nt fCoefficient Values

7.735 8.129 -3.213 0.399 0.931

46.6175 0.330

Standard Error

389.798 4.854 5.480 3.759

Significant –t 0.987 0.343 0.662 0.933

The above table depicts the summarized results of multiple regression

analysis produced by using SPSS software for determining the combined

effect of EPS, DPS and NWPS on MPS of Himalayan General Insurance Co.

Ltd. for the five years study period. The regression constant a1 of HGICL

is 7.735 which imply that MPS does not go below that level even if the

value of EPS, DPS, and NWPS are zero. The regression coefficient b1

represents that one rupee increase in EPS leads to an average increase

in MPS by 8.129 if the other two variables; DPS and NWPS are kept

constant. However the value of b1 may vary by rupees 4.854 as it

explain by the standard error of b1. Similarly, the regression coefficient

b2 measures the average effect of DPS on MPS. The value of b2 being -

3.213 indicates that one rupee increase in DPS leads to a decrease in

MPS by Rs.3.213, holding the two other variables constant. However it

may vary by Rs.5.480 due to the standard error of b2. Like wise the

coefficient b3 measures the average effect of NWPS on MPS. The value of

b3 which is equal to 0.399 indicates that an average increase in NWPS by

one rupee leads to decrease in MPS by 0.399.The coefficient of

determination r2 explains that 93.10% variation in MPS is caused by the

76

variation in EPS, DPS and NWPS and 6.90% variation in MPS is due to the

other irrelevant factors. The estimation of MPS might be inaccurate by

Rs.46.6175 as the standard error of estimate. As the significant F value

is 0.33 for Himalayan General Insurance which is more than 0.05, the

relationship established by this model is insignificant at 5% level.

Multiple Regression Equation for Everest Insurance:

MPS=a+b1.EPS+b2.DPS + b3.NWPS

Table: 5.11 Regression Coefficient for Everest Insurance.Descripti

ona1 b1 b2 b3 r2 S.E.E Significa

nt fCoefficient Values

554.115 16.256 8.240 7.161 0.928

0.9327 0.40

Standard Error

133.452 0.942 0.119 0.431

Significant –t

0.16 0.13 0.19 0.18

The above table shows the combined effect of EPS, DPS and NWPS on

MPS of Everest Insurance Company for the five years study period. The

regression constant a1 of Everest Insurance is 554.115 which implies that

MPS does not go below that level even if the values of EPS, DPS, and

NWPS are zero. The regression coefficient b1 represents that one rupee

increase in EPS leads to an average increase in MPS by Rs. 16.256 if the

other two variables; DPS and NWPS are kept constant. However the

value of b1 may vary by rupees 0.942 as it explained by the standard

error of b1. Similarly, the regression coefficient b2 represents that one

rupee increase in DPS leads to an average increase in MPS by Rs. 8.240

if the other two variables; EPS and NWPS are kept constant. Like wise

the coefficient b3 measures the average effect of NWPS on MPS. The

value of b3; 7.161 indicates that an average increase in NWPS by one

rupee leads to increase in MPS by Rs. 7.161. The coefficient of

determination r2 explains that 92.8% variation in MPS is caused by the

variation in EPS, DPS and NWPS respectively, whereas 7.2% variation in

MPS is due to the other extraneous factors. As the significant F value is

0.40 which is more than 0.05, the relationship established by this model

for Everest Insurance Co’s MPS is insignificant at 5% level.

77

Multiple Regression Equation for Banking Sector:

MPS=a+b1.EPS+b2.DPS + b3.NWPS

Table: 5.12 Regression Coefficient for Banking Sector.Descripti

ona1 b1 b2 b3 r2 S.E.E Significa

nt fCoefficient Values

652.035 14.357 4.519 -3.746 0.619

355 0

Standard Error

298.492 4.895 3.825 2.275

Significant –t

0.040 0.008 0.251 0.114

The above table shows the outcomes of multiple regression analysis for

the banking sector. The regression coefficient b1 is 14.357 which imply

that one rupee change in EPS leads to the average of about Rs. 14.357

increase in MPS of the whole banking sector if other two variables are

kept constant. However the standard error for b1 shows that the MPS

might vary by Rs. 4.895. Similarly the regression coefficient b2 and b3 is

4.519 and -3.746 respectively. This indicates that the MPS of banking

sector will increase by Rs. 4.519 in average if DPS is increased by Rs. 1

and the MPS will decrease by Rs. 3.746 if NWPS is increased by Rs. 1 and

other two variables are kept constant for each case. Although increase in

NWPS should not decrease the value of MPS, the irrelevant result

occurred due to the short study period. The value of standard error of b2

and b3 is 3.825 and 2.275 respectively, which indicate that the value of

MPS by the impact of DPS and NWPS could vary by Rs. 3.825 and Rs.

2.275 respectively. The regression constant a with the value of 652.035

indicates that MPS of banking sector does not go below Rs. 652.035 in

average even if EPS, DPS and NWPS have value of zero. But the standard

error of estimate of the model reveals that the estimation of MPS may

vary by Rs. 355. The coefficient of determination (r2) explains that 61.9%

variation in MPS is due to the variation in EPS, DPS and NWPS whereas

38.1% variation in MPS is caused by other external factors. The

regression model is statistically significant at 5% level of significance as

the significant F value is 0 which is less than 0.05.

78

Multiple Regression Equation for Finance Sector:

MPS=a+b1.EPS+b2.DPS + b3.NWPS

Table: 5.13 Regression Coefficient for Finance Sector.Description A b1 b2 b3 r2 S.E.E Significa

nt fCoefficient Values

75.633 0.364 0.425 0.879 0.401

131.547 0.147

Standard Error 76.492 1.252 1.554 0.765Significant –t 0.346 0.777 0.790 0.277

The above table explains the multiple regression analysis to determine

the combine effect of EPS, DPS and NWPS on MPS computed by SPSS

software of the selected companies of finance sectors so that they could

represent whole finance sector. During the five years study period. The

regression constant of MPS (a) of finance sector is 75.633 which imply

that MPS does not go below Rs. 75.633 even if the values of EPS, DPS,

and NWPS are zero. The regression coefficient b1 represents that one

rupee increase in EPS leads to an average increase in MPS by Rs. 0.364 if

the other two variables; DPS and NWPS are kept constant. However the

value of b1 may vary by rupees 1.252 as it explained by the standard

error of b1. Similarly, the regression coefficient b2 measures the average

effect of DPS on MPS. The value of b2, 0.425 indicates that one rupee

increase in DPS leads to an increase in MPS by Rs.0.425, holding the two

other variables; EPS and NWPS are left constant. However the value of

DPS may vary by Rs. 1.554 due to the standard error. Like wise, the

coefficient b3 measures the average effect of NWPS on MPS. The value of

b3, 0.879 indicates that an average increase in NWPS by one rupee leads

to increase in MPS of finance sector by Rs. 0.879. The coefficient of

determination r2 explains that 40.1% variation in MPS of finance sector is

caused by the variation in EPS, DPS and NWPS respectively, whereas

59.9% variation in MPS is due to the other extraneous factors. Since the

impact of EPS, DPS and NWPS in MPS should be maximum then other

external factors, this derived result seems irrelevant. This occurs

because of the short study period. Similarly, the significant F for the

financial sector is 0.147 which indicates that the relationship established

79

by this model is significant only on the level of 14.7% and it is

insignificant at the level of 5%.

Multiple Regression Equation for Insurance Sector:

MPS=a+b1.EPS+b2.DPS + b3.NWPS

Table: 5.14 Regression Coefficient for Insurance Sector.Descripti

ona1 b1 b2 b3 r2 S.E.E Significa

nt fCoefficient Values

-30.951 4.397 5.591 0.52 0.806

72.275 0.031

Standard Error

305.613 7.453 9.448 3.027

Significant –t

0.923 0.581 0.580 0.87

As shown in the above table, the regression constant a1 of insurance

sector is -30.95 which implies that MPS does not go below Rs. -30.95 for

the insurance sector in average even if the values of EPS, DPS, and

NWPS are zero. However negative MPS is ridiculous in practice and such

impractical result occurs due to the sampling error. The regression

coefficient b1 represents that one rupee increase in EPS leads to an

average increase in MPS of the finance sector in average by Rs. 4.397 if

the other two variables; DPS and NWPS are kept constant. However the

value of b1 may vary by rupees 7.453 as it explained by the standard

error of b1. Similarly, the regression coefficient b2 measures the average

effect of DPS on MPS. The value of b2, 5.591 indicates that one rupee

increase in DPS leads to an increase in MPS of finance company by Rs.

5.591, holding the two other variables; EPS and NWPS are left constant.

Like wise the coefficient b3 measures the average effect of NWPS on

MPS. The value of b3 which is equal to 0.52 indicates that an average

increase in NWPS by one rupee leads to increase in MPS by Rs. 0.52. The

coefficient of determination r2 explains that 80.60% variation in MPS of

the financial sector is caused by the variation in EPS, DPS and NWPS

respectively, whereas 19.40% variation in MPS is due to the other

extraneous factors. The standard error of estimate of that model reveals

80

that the estimation of MPS might vary by Rs.305.613 and as the

significant F value is 0.031 which is less than 0.05, the relationship

established by this model is significant at 5% level.

Multiple Regression Equation for Banking, Finance and

Insurance Sector:

MPS=a+b1.EPS+b2.DPS + b3.NWPS

Table: 5.15, Regression Coefficient for Banking, Finance and Insurance Sector.Descripti

ona1 b1 b2 b3 r2 S.E.E Significa

nt fCoefficient Values

101.527 5.558 5.565 0.417 0.603

364.6 0

Standard Error

162.839 2.755 2.609 1.472

Significant –t

0.536 0.050 0.039 0.778

The above table shows the outcomes of multiple regression analysis for

the whole banking, insurance and finance sector. The regression

coefficient b1 is 5.558 which imply that one rupee change in EPS leads to

the average of about Rs. 5.558 increase in MPS of the whole banking and

insurance sector if other two variables are kept constant. However the

standard error for b1 shows that the MPS might vary by Rs. 2.755.

Similarly the regression coefficient b2 and b3 is 5.565 and 0.417

respectively. This indicates that the MPS of banking sector will increase

by Rs. 5.565 in average if DPS is increased by Rs. 1 and the MPS will

increase by Rs. 0.417 if NWPS is increased by Rs. 1 and other two

variables are kept constant for each case. The value of standard error of

b2 and b3 is 2.609 and 1.472 respectively, which indicate that the value

of MPS determined by the above model due to the cause of DPS and

NWPS could vary by Rs. 2.609 and Rs. 1.472 respectively. The regression

constant a with the value of 101.527 indicates that MPS of whole

banking, finance and insurance sector does not go below Rs. 101.527 in

average even if EPS, DPS and NWPS have value of zero. But the standard

error of estimate of the model reveals that the estimation of MPS may

vary by Rs. 162.839. The coefficient of determination (r2) explains that

60.3% variation in MPS of the whole sector is due to the variation in EPS,

81

DPS and NWPS whereas 39.7% variation in MPS is caused by other

external factors. The regression model is statistically significant at 5%

level of significance as the significant F value is 0 which is less than 0.05.

5.2 Pricing Status of Stock:

The status of the pricing of the stocks of particular company is evaluated

by comparing the required rate of return and actual rate of return. If

required rate of return is more than actual rate of return then the stock

is called overpriced and if the actual rate of return is more than required

rate of return of such stock then that stock is called under priced.

Similarly, if the required rate of return equals actual rate of return then

that stock is called equilibrium priced. The detailed calculation of

required rate of return and Actual rate of return is presented in Annex.

Table: 5.16; Status of the Market Price of the Shares of the Sample Companies

S. No Sector Name of the Company

Beta

( )

Required Rate of Return

(Rj)

Actual Rate of Return

(R)

Status of the stock of

the company

1

Banking

NABIL 1.28

14.6% 30.06% Undervalued

2 Standard Chartered

0.86

11.12% 23.24% Undervalued

3 Himalayan Bank

0.83

10.89% 19.36% Undervalued

4Nepal

Bangladesh Bank

1.62 17.39% 63.86%

Undervalued

5 Everest Bank 1.49

16.33% 61.81% Undervalued

6

Finance

Annapurna Finance

2.35

20.64% 44.18% Undervalued

7 Peoples Finance

2.30

20.29% 27.78% Undervalued

8 Universal Finance

2.92

24.63% 48.82% Undervalued

9Insuranc

e

Himalayan Insurance

2.60

30.97% 29.45% Overvalued

10 Everest Insurance

2.65

31.56% 43.14% Undervalued

82

Required Rate of Return(R)=if R>Rj then the stock is under valuedif Rj>R then the stock is over valued

From the above summarized table, the required rate of return of NABIL

bank is 14.6% where as actual rate of return is 30.06% during the study

period. Hence the actual rate of return is higher than the required rate of

return, the price of the stock of NABIL bank is called undervalued.

Similarly, the required rate of return of SCB is 11.12% whereas actual

rate of return is 23.24% during the study period. Since the actual rate of

return is higher than the required rate of return, the price of stock of SCB

is also called undervalued. In the same ground the required rate of

return of HBL is 10.89% and the actual rate of return is Rs.19.36%. The

actual rate of return is higher than the required rate of return. Since the

price of the stock of HBL is also undervalued. In the same line the

required rate of return of NB bank is 17.39% and the actual rate of

return is 63.86% during the study period. Hence the required rate of

return is less than the actual rate of return since the price of stock is

called under priced. In the same ground the required rate of return of

Everest Bank Ltd. is 16.33% and actual rate of return is 61.81%. It shows

that the actual rate of return is also higher than the required rate of

return during the study period. Since the stock of Everest Bank Ltd. is

also undervalued.

Similarly the required rate of return of Annapurna Finance is 20.64% and

actual rate of return during the study period is 44.18%. It implies that

the actual rate of return is more than the required rate of return. Thus it

can be concluded that the stock of Annapurna Finance is undervalued. In

the same way the required rate of return and actual rate of return of

Peoples Finance during the study period is 20.29 % and 27.78% during

the five years study period. It shows that the required rate of return is

less than the actual rate of return thus it can be concluded that the stock

of such company is also undervalued. As well as the required rate of

return and actual rate of return of another finance co. i.e. Universal

83

Finance & Capital Markets Ltd. is 24.63% and 48.82% during the study

period. It reveals that the actual rate of return of such co. is higher than

the required rate of return in the same period. So such price of stock of

such company is called undervalued.

Similarly the required rate of return of Himalayan General Insurance Co.

as calculated above is 30.97% and the actual rate of return is 29.45%

during the study period. It shows that the required rate of return is

greater than the actual rate of return during the period. Hence it can be

concluded that the stock of Himalayan General Insurance Co. is called

overvalued during this study period. The required rate of return of

Everest Insurance Co. during the study period is calculated 31.56% and

the actual rate of return during the same period is 41.43%. Hence the

actual rate of return is higher than the required rate of return .Therefore

it can be concluded that the stock of Everest Insurance Co. during the

study period is called undervalued.

From above table in summarize it was found that the 5 banks taken as

samples all were under-priced. Likewise, among the three finance

companies taken as sample the stock of all finance companies are

under-priced during the study period. Similarly the status of among two

insurance companies taken as sample companies, one i.e. Himalayan

General Insurance Co. was found overpriced and another one was found

under-priced. So, in total among 10 companies taken as sample

companies from three sectors the stock of 9 companies’ stock were

under-priced and one from insurance sector was overpriced. None of the

sample companies shares were equilibrium priced since the sample

company’s shares was not found reasonably priced during the study

period.

The main reason for under-valuation of the stock of the sampled

companies is that the price of the stock had reached the highest point

during the study period of the banking and financial companies. But the

NEPSE index did not follow the same speed and the rate of Treasury bill

84

issued by NRB also heavily decreased during the study period. It makes

the actual rate of return of the sampled companies high and the required

rate of return low. So, most of the sampled companies’ share price

become undervalued during the study period. Similarly, the calculated

required rate of return of the sampled companies seems too low to

invest for the investors. As, finance companies and other cooperatives

are offering about 9% to 12% return on fixed deposit with out any risk,

no investors will invest on the stock with lower required rate or return by

taking higher risk. The calculated required rate of return of the

companies is low because of taking few years data for calculation.

5.3 Analysis of Signaling and Informational Effect on

the Stock Price:

To observe the impact of signaling and informational effect paired t-test

has been conducted. For analyze purpose to see the impact of signaling

factors on NEPSE Index during the period of major 5 events the 10 days

market index of NEPSE of before and after the events has been taken as

consideration for four events and remaining one event i.e. 5 Major

Political parties movement before and after 7 Monthly index has been

taken as consideration due to the long term effect in comparison to

other events. These event wise data has been analyzed with the help of

paired t-test. The details of calculation of paired t-test have been shown

in Annexure and the summarized table of the calculation has been

presented as below:

Table: 5.17; Result from t-test

S.No

Events(Research Variable)

Tabulated T-value

Calculated T- value

RemarksNull

Hypothesis1 Ashwin-18,2059

event2.262 1.969 Accepted

2 Ceasefire on Magh 15, 2059

2.262 6.3647 Rejected

3 Rupture of peace-talk and re-starting war at Bhadra-10 , 2060

2.262 2.0429 Accepted

4 Nepal's entry on WTO on Sep-11, 2003

2.262 1.88 Accepted

85

5 Five Major political parties' movement

2.447 3.0724 Rejected

From the above table it is clear that from the paired t-test, the tabulated

value at 9 degree freedom for above first 4 events (S.No.1-4) at 5 %

level of significance is 2.262 and last one, S.No. 5 for 6 degree freedom

at 5 % level of significance level is 2.447.

While considering the event of Ashwin 18, 2059, the calculated value of t

is 1.969, less than tabulated value. So, null hypothesis is accepted and

alternative hypothesis is rejected. It means that the signaling factors on

the event of this Ashwin 18, 2059 has not affected the price of the stock

based on the analysis of above data. Although the null hypothesis is

accepted, the following chart shows that the NEPSE index in decreasing

trend before the event and it start to increase after the event. The null

hypothesis is accepted because the increasing and decreasing trend is

within the 5% level of significance.

Chart: 5.1

NEPSE Trend For previous 10 and next 10 days of Ashoj 18

214

215

216

217

218

219

220

221

222

223

224

1 2 3 4 5 6 7 8 9 10Days

NE

PS

E i

nd

ex

first 10 daysnext 10 days

Ceasefire between Maoist and Government and start of peace talk

brought some sort of peace in that time in the country. By this reason

favorable environment had seen in economy and most of the investors

had feel peace and safety environment and all the investors were

86

started thinking positively and hence the NEPSE index has risen during

the period of ceasefire.

This has been also verified by paired t-test that the tabulated value of

paired t-test is less than the calculated value of t-test. Hence the null

hypothesis was rejected at 9 degree freedom at 5 % level of significance.

It revels that the cease fire even has played the vital role in change in

the share price. So there is significant change in share price before and

after the event of ceasefire and start of peace talk in the nation. This can

also be proved by the following chart which compares the trend line

between the index of NEPSE before 10 days of ceasefire and after 10

days of ceasefire.

Chart: 5.2

NEPSE Trend For previous 10 and next 10 days of Ceasefire on Magh 15

180

185

190

195

200

205

210

215

220

225

230

1 2 3 4 5 6 7 8 9 10Days

NEP

SE

Ind

ex

first 10 days

next 10 days

As Maoist violated the ceasefire and then the re-war has started in the

country in Bhadra 10, 2060 the NEPSE index starts to go down which can

be seen in the following chart also. However in the paired t-test the

calculated value of t is less than the tabulated value of t-test at 5 % level

of significance and the null hypothesis was accepted. So, mathematically

it revels that there is no significant change in share price before and

after the event of breaking the cease fire and re-start of war. The result

87

has came out due to taking the 10 days NEPSE index before and after

the event but the breaking down of ceasefire was foreseeable before

two weeks of the actual event. So the market index in NEPSE was

affected before the date of actual event. The trend line of 10 days’

NEPSE index before and after the breaking down of cease fire can be

presented in the following chart.

Chart: 5.3NEPSE Trend For previous 10 and next 10 days of Re-War on Bhadra 10

196

198

200

202

204

206

208

210

212

214

1 2 3 4 5 6 7 8 9 10Days

NE

PS

E I

nd

ex

f irst 10 days

next 10 days

While considering the event of the declaration of Nepal’s entry in WTO,

on Bhadra-25, 2060 (11-Sep, 2003), the calculated value of t is 1.88,

lower than tabulated value. So, null hypothesis is accepted and

alternative hypothesis is rejected. It means that the signaling factors on

the event of Nepal’s entry in WTO have not affected the price of the

stock based on the analysis of above data. The trend of the index on the

NEPSE for the previous 10 days and after 10 days of the event of Nepal’s

entry in WTO at Bhadra 25, 2060 can also be presented in the following

chart. Although the chart shows that the price index has increased

88

slightly after the event, it is still under the 5% level of significant. So, the

null hypothesis is accepted.

Chart: 5.4NEPSE trend for previous 10 and next 10 days of Nepal's entry in

WTO

196

198

200

202

204

206

208

210

212

1 2 3 4 5 6 7 8 9 10Days

Ind

ex

f irst 10 days

next 10 days

Due to the political change in the country after the event of Ashwin 18

2059, the major political parties are against this action and started to

protest this. By this reason political instability has seen in the country

during this period. So the investors have also affected by this cause and

the trading of stocks in NEPSE has badly affected.

This has been also proved by the paired t-test, as null hypothesis

rejected. That the tabulated value at 6 degree freedom at 5% level of

significance is 2.447 whereas the calculated value is 3.0724 which is

greater than the tabulated value. It revels that the share price has been

affected by the movements of major five political parties in the country.

The following chart compares the NEPSE index of seven months before

the political parties’ movement and NEPSE index of seven months after

the commence of the movement.

Chart: 5.5

89

NEPSE Index for Previous 7 Months and Next 7 Months of Five Parties' Movement

185

190

195

200

205

210

215

220

225

230

1 2 3 4 5 6 7Months

NE

PS

E In

dex

f irst 7 months

Next 7 months

5.4 Investors’ Response toward the Change of Stock Price

Questionnaire Analysis

To find out the investors attitude toward the pricing of the securities and

the relevant information regarding the prices of stocks, different types of

questionnaires has been prepared and distributed to different sectors

respondents. To collect the relevant data, the questionnaires have been

distributed to the respondents on stratified random sampling basis. All

together 100 sets of questionnaires were presented in front of the

respondents. To get the quick and full response, all the questions were

objective types. Out of 100 questionnaires, 83 were responded.

Investment Pattern in Shares of Listed Companies

The first question was asked regarding the investment pattern of shares

of listed companies. Out of 83 respondents 64 which is 77.00% have

given their positive answer i.e. yes that means they have invested in the

shares of the listed companies. And 19, which is 23% have given their

negative answer i.e. No.

Table:5.18; Investment PatternResponse No. Of Investors %Yes 64 77%No 19 23%

Total 83 100

90

Investors Interest in Sector Wise Investment

Similarly in our second question was about the investors’ opportunity on

different sector wise investment. For this question has been prepared

with two sectors i.e. Security sector and non- security sector. Out of

them in security sectors weight is 77% and non-security sectors weight

is 23%. On which in security sector 35 which is 55% respondents out of

83 said better opportunity in banking sector and least 1 which is 2% of

the respondents said least opportunity in hotel sector. Based on the

present economic and political situation and unsatisfactory performance

of tourism sector the respondents have given the minimum weight for

the hotel sector. Similarly, the dividend distributed by banking sector as

well as better performance of banking sector are the major causes for

the respondents to choose it.

Similarly in non-security sector most of investors 9 i.e.47% said for fixed

assets investments and least 1 i.e.5% investors said for business

venture. By analyzing the present political as well as economical

situation of the country, respondents are not interested to invest for

business venture. So, only 1 of the total respondents prefers for business

venture. The summarized results can be presented in following table.

Table: 5.19; Investors’ Interest in Different Sector

Response No of respondents %Weighted

Security SectorBank 35 55%Finance Co. 11 17%Insurance Co 9 14% 77%Manufacturing 2 3%Trading 3 5%Hotel 1 2%Others 3 5%Total 64 100%Non Securities SectorBank Fixed Deposit 7 37%

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Fixed Assets 9 47%Business Venture 1 5% 23%Others 2 11%Total 19 100%Grand Total 83 100%

Purpose of Holding Shares of the Company:

Investors were asked for the cause of purchasing shares and the options

were given as a) Dividend, b) Social Status, c) Price Appreciation and d)

To become director. Among the 64 respondents who invested in shares,

23 i.e. 36% of the respondents said they own shares for dividend.

Similarly 8 of the respondents i.e. 13% own shares in lieu of social status

in the society and major of the respondents, 33 which is 52% of the total

respondents own shares for price appreciation in future. None of the

respondents were interested to own shares to become director of

company. It revels that major of the respondents own shares of

companies for price appreciation. The following chart summarize above

description.

Chart: 5.6

Trading of Shares in the Secondary Market:

Investors were asked if they have ever sold their shares in secondary

market or not. Out of 64 respondents who have invested in shares, 23 of

them i.e. 36 % of the respondents have sold their shares in secondary

markets and 41 i.e. 64% of the respondents have never sold any shares

in secondary market they have owned.

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Purpose of Owning Shares

23, 36%

8, 13%

0, 0%

33, 51%

Dividend

Social Status

Price Appreciation

To become director

Table: 5.20; Investors Trading in Secondary MarketS.No

Research variables

No. Of investors %

1 Yes 23 36%2 No 41 64%

Total 64 100%

Again the investors were asked for the reasons for selling shares they

were owning and the option for their response was a) For personal need,

b) To buy other stocks c) Expectation of price fall, d) No payment of

dividend by the company and e) Current price appreciation. Of the total

23 investors who sold their shares in secondary market, 7 which is 30%

have sold their shares to fulfill their emergency personal needs. Similarly

3 which is 13% each of investors who sold their shares in secondary

market sold their shares to buy other securities and expectation of

future price fall. It was found that the cause to sell the securities to buy

other securities and expectation of future price fall is equal.

In the same ground 2, which is 9% were sell their securities due to no

payment of dividend by the company. Majority of the respondents sold

their shares because of current price appreciation. The no of

respondents is 8, 35%.

Chart: 5.7

The next question for the investors was if they have bought shares from

secondary market. Of the total 64 investors who invest their money in

securities, 18 that is 28 % have purchased shares from secondary

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Reasons for selling shares in secondary market

Emergency Personal Need

To buy other securities

Expectation of future pricefallNo payment of dividend

Current price appreciation

30%

13%

13%

35%

9%

87

3

32

market and 46 that is 72% of them have not purchased shares from

secondary market. This result has been expressed in the following table.

Table: 5.21; Investors Purchasing Shares form Secondary Market

S.No.

Research variables No. Of investors %

1 Yes 18 28%2 No 46 72%

Total 64 100%

Similarly, the respondents were asked for reasons to purchase shares

from secondary market and their available options as answers were a)

high rate of dividend b) expected price appreciation c) to invest excess

money and d) speculative purpose. Of the 18 investors who have

purchased shares from secondary market, 6 that is 33% purchased the

shares to get the higher rate of dividend declared by the company.

Similarly, 7 which is 39% of them invested their money in shares through

secondary market because of the future expected price gain. Only one

which is 6% of the respondents answered that he/she purchase the

shares form secondary market to utilize excess money he/she holding. 4

which is 22% of the investors who purchased shares from secondary

market for speculative purpose.

Table: 5.22; Causes for Investing in Secondary Market

S.No. Research Variables

No. Of investors %

1 For high rate of dividend 6 33%

2Expected price appreciations 7 39%

3 To invest excess money 1 6%4 Speculative purpose 4 22%

Total 18 100%

Investors Interest on Price of the Shares

To know the interest of investors towards their shares’ price, one

question was presented as how often the investors seek the prices of

securities they have purchased. Of the total 64 respondents, 12 which is

19% of the total investors told that they look for the price of their

securities daily. Similarly, 27 i.e. 42%, 4 i.e. 6%, 21 i.e. 33% and 2 i.e.

3% of the investors seek the price of their shares weekly, monthly,

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seldom and never respectively. The result of this question is presented

in the following table.

Table: 5.23; Investors Seeking for Share PriceS.No

Research variables

No. Of investors %

1 Daily 12 19%2 Weekly 27 42%3 Monthly 4 6%4 Seldom 21 33%5 Never 2 3%

Total 64 100

Factors Affecting Price of Shares

Regarding the influencing factors for price fluctuation of share in capital

market different investors gave different views and their own ideas. 26

of the total 83 respondents, that is 31% gave their views as dividend as

the influencing factors, 19 that is 23% said earning per share, 11 which

is 13% said political stability of the country,14 which is 17% said

economic growth of the country, 5 that is 6% said world wide trend, 2

which is 2% of the respondents said volume of transactions and 6 which

is 7% said rumors. Theoretically, DPS and EPS are the major factors to

influence the share price of a company which is also reflected in the

respondent’s view.

Table: 5.24; Factors Affecting Price of SharesResearch variables

No. Of investors %

1 Dividend 26 31%2 Earning Per Share 19 23%3 Political Stability 11 13%4 Economic Growth 14 17%5 World Wide Trend 5 6%

6Volume of Transactions 2 2%

7 Rumors 6 7%Total 83 100%

Investors Views Regarding the Returns from their Investment

To find out how much the investors are satisfied from the returns from

their investments, question was presented to the respondents as the

level of return from the investment presently getting in comparison their

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expectation. None of the respondents replied that they are getting very

high return however 5 out of 64 which is 6% replied that they are

getting high level of return, similarly 22 that is 27% said moderate, 25

that is 30% low and 12 that is 14% very low. The results is presented in

the following

Table: 5.25; Satisfaction form the Return of Shares

S.No.

Research variables

No. Of investors %

1 Very High 0 0%2 High 5 6%3 Moderate 22 27%4 Low 25 30%5 Very Low 12 14%

Total 64 100%

5.5 The Major Findings:

The major findings based on the analysis are presented as follows:

1. According to the coefficient of co-relation the relationship of MPS on

EPS, DPS, NWPS and current year’s DPS of HBL, NB bank, Everest

bank, Universal finance, Himalayan General Insurance and Everest

Insurance are all positive. Similarly, in case of NABIL bank and

Peoples Finance, the relationship of MPS on EPS, NWPS is positive and

with last year’s dividend is negative. But the calculation shows that

there is no relationship between MPS and DPS of NABIL bank where as

People Finance has not declared any dividend during the study

period. In case of SCB, the three financial indicators, DPS, NWPS and

last year’s dividend is negative and there exists no relation with EPS.

Similarly, for the Annapurna Finance the relationship of MPS with EPS

is negative where as the relation is positive with DPS, NWPS and last

year’s dividend. Disregarding the exceptional case, it is found from

the calculation of correlation coefficient that in average for all

companies, EPS, DPS and NWPS has good positive relationship with

MPS and EPS is the most influencing factor among them.

2. According to the multiple regression, during the five years study

period, the DPS and NWPS of NABIL bank is negatively influenced

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MPS. Similarly, the analysis shows that the combined effect on MPS of

EPS, DPS and NWPS of NABIL bank is 47.10% which indicates that the

change in MPS of the NABIL is due to the combined effect of EPS, DPS

and NWPS and 52.90% change in MPS is caused by other external

factors. The calculated value of significant f (0.836), shows the

calculated model of multiple regression is statistically insignificant at

5% level of significance.

3. The combined effect on MPS of EPS, DPS and NWPS of SCB is 93.20%

which indicates that the change in MPS of the SCB is due to the

combined effect of EPS, DPS and NWPS and only 7.80% change in

MPS is caused by other external factors. The regression model is

statistically insignificant at 5% level of significance as the value of

significant f is 0.328 which is greater than 0.05.

4. The regression model for HBL shows that EPS, DPS and NWPS

significantly affected the MPS of HBL. Only 15.8% variation on MPS is

caused due to the other factors than EPS, DPS and NWPS. But this

relationship established by regression model is statistically

insignificant at 5% level of significance as the value of significant f is

0.49 which is greater than 0.05.

5. The combined effect on MPS of EPS, DPS and NWPS of NB bank is

98.10% which indicates that the MPS of NB bank is most significantly

affected by these factors during the study period. The regression

model is statistically insignificant at 5% level of significance as the

value of significant f is 0.19 which is greater than 0.05.

6. The pricing behaviour of MPS of Everest Bank is significantly

influenced by the combined effect of EPS, DPS and NWPS of the

company during the study period. And only 6.00% change in MPS is

caused by other external factors different then EPS, DPS and NWPS.

The regression model is statistically insignificant at 5% level of

significance as the value of significant f is 0.309 which is greater than

0.05.

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7. Different form the sample banking companies, the fluctuation in the

MPS of AFCL is less affected by the combined effect of EPS, DPS and

NWPS and 88.00% variation in MPS is caused by other irrelevant

factors. And the regression model is statically insignificant at 5 %

level of significance.

8. The combined effect on MPS of EPS and NWPS of Peoples Finance Co.

Ltd. is 46.20% which indicates that the change in MPS of the Peoples

Finance Co. is due to the combined effect of EPS and NWPS and only

53.80% change in MPS is caused by other external factors. Since,

Peoples Finance did not distribute any dividend during the study

period; the affect of DPS on MPS could not be calculated. The

regression model is statistically insignificant at 5% level of

significance as the value of significant f is 0.538 which is greater than

0.05.

9. The change in MPS of UFL due to the combined effect of EPS, DPS and

NWPS by 98.90% and 1.10% variation is caused by other irrelevant

factors. And the regression model is statistically insignificant at 5%

level of significance as the value of f is 0.134.

10. The change in MPS of Himalayan General Insurance Co. due to the

combined effect of EPS, DPS and NWPS by 93.10% and 6.90%

variation is caused by other irrelevant factors. The regression model

is statistically insignificant at 5% level of significance that the value of

f is 0.33.

11. As per the result of whole banking sector, in average 61.9%

change in the MPS of the banking sector companies is due to the

effect of the change in EPS, DPS and NWPS of the banking companies

only 39.10% variation in MPS is caused by the other irrelevant factors.

So, the calculation shows that EPS, DPS and NWPS of banking sectors

companies are more important in the formation of MPS than other

factors. Similarly, the regression model is also statistically significant

at 5% level of significance that the value of f is 0.

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12. Difference from the banking sector, the change in MPS of the

whole Finance Co. sector is less which is 40.1% affected by financial

indicators like EPS, DPS and NWPS and more which is 59.9% due to

the other factors. The regression model is statistically insignificant at

5% level of significance.

13. As per the result computed from the combined effect on MPS of

EPS, DPS and NWPS as a whole Insurance sector is 80.60%, which

indicates that in average, the change in MPS of Insurance companies

is due to the combined effect of EPS, DPS and NWPS and only 19.40%

variation is caused by the other factors. The regression model is

statistically significant at 5% level of significance that the value of f is

0.031 which is greater than 0.05.

14. The result computed from the whole sampled companies shows

that the change in MPS of the sampled companies during the study

period is affected due to the change in EPS, DPS and NWPS by 60.3%

and 39.7% change in MPS is due to the other factors than these

financial indicators. It shows that in average, the pricing behaviour of

the sampled companies is significantly affected by EPS, DPS and

NWPS. This relationship model is also statistically significant at 5%

level of significance.

15. With respect to the calculation of actual rate of return and required

rate of return, 9 companies out of 10 have actual rate of return are

more than required rate of return. So, these companies stock price

are under priced where as the actual rate of return of Himalayan

General Insurance is less than required rate of return; thus its stock

price is found over priced. From the calculation it is found that in

average the required rate of return is low and investors would not

invest in shares for such low return instead they will invest in fixed

deposit of banking and financial institutions which is less risky

compared to shares. But this result occurs due to the calculation of

only five years data and drastically decreasing interest rate and risk

free rate.

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16. It is find out from the T-test that the political event of Ashwin-18,

2059 has not significantly affected the stock price at NEPSE.

17. As the peaceful environment in a country play a catalyst role in the

investing activity, the share price on NEPSE has been positively

affected by the event of Ceasefire on Magh 15, 2059 as the

alternative hypothesis accepted that null hypothesis rejected at 5%

level of significance at 9 degree of freedom. It shows that Nepalese

investors are aware of the political and other environment of the

country.

18. The signaling and informational factors on the event of rupture of

peace talk and re-start of war on Bhadra 10, 2060 has not affected

the price of the stock in NEPSE based on the analysis as the null

hypothesis accepted at 5% level of significance at 9 degree freedom.

19. The share price in NEPSE has not been affected due to the

signaling factors on the event of Nepal’s entry in WTO on 11-Sept.

2003 as the null hypothesis accepted at 5% level of significance at 9

degree freedom.

20. The NEPSE index has affected by the event of five major parties

political movement as the alternative hypothesis accepted at 5%

level of significance and 6 degree freedom.

21. On analyzing the primary data collected from the respondent most

of the investors were asked for their preference of investment sector

major portion of them choose the banking sector and minor for hotel

sector and business venture.

22. It was found that the investors’ major motives for owning the

shares of company are for better price appreciation and to receive

the dividend.

23. An evident find out from the study is that Nepalese stock market

has the shortage of professional investors. It seems that investors buy

the stock only for dividend and they are not interested on speculative

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motive. Some investors are interested on the pricing behavior but

they are not interested on trading of the shares in secondary

markets. Similarly, people are only investing in shares with the excess

money they have over their expenditure. So, Nepalese security

market has the shortage of professional investors.

24. Major of the investors are not trading in secondary market and

those who trade in secondary market, sold their shares due to the

expected price appreciation and few of the investors sell their shares

due to the non declaration of the dividend by the company.

25. As per the respondent major of the investor who purchases the

shares from the secondary market, purchase it due to the high rate of

dividend.

26. The respondents are aware about the price of their share which

they own that major of the respondents used to seek the price of their

shares on weekly basis on secondary market.

27. It has been proved that the major influencing factor to the price of

the share is current dividend that respondents given the high weight

for dividend and lowest weight was given to the volume of transaction

out of seven options.

28. As per the respondents investors are not satisfied for the level of

return which they are getting as major of the respondents replied for

level of return to low out of the five options.

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CHAPTER – 6SUMMARY, CONCLUSION AND

RECOMMENDATIONS

This chapter presents the summary and conclusions drawn form the

analysis of the study. The study was conducted to find out the behavior

of stock price with respect to the movement of various financial

indicators, certain external events and other factors. Similarly, the study

also tried to find out the investors’ response toward the change in the

MPS of their stock. For these purpose, 10 sampled companies were

selected and the study was based on the five years data of the

corresponding selected companies from 1997-98 to 2001-02. Various

statistical as well as financial tools were adopted as test methodology.

6.1 Summary

Price of security is the outcomes of investor’s psychology. The

psychology of investors is affected by various factors. Here in Nepalese

market, dividend and price appreciation of stock is major factors for the

investors to decide about purchasing of shares. Along with the DPS and

price appreciation, EPS, NWPS, market rumors, political and economic

environment etcetera are the other factors to influence the buying and

purchasing behavior of the investors. But one must look into financial

status of organization before making investments. If the organization is

not financially strong then it is likely to loose one’s investment one day

or other.

The first objective of the study is to find out the relationship of market

price of share (MPS) with various financial indicators like EPS, DPS, NWPS

and last year's dividend. To find out the above stated objective financial

as well as statistical tools have been used. Among the 10 selected

companies, the most positive relationship of MPS with EPS is 0.79 of NB

bank and the least relationship of MPS with EPS is -0.22 of UFL. Similarly,

in case of DPS, the highest relationship is 0.97 of NB bank and lowest

relationship is -0.29 of Everest Insurance Company. With regard to the

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NWPS, NB bank's MPS has most positive relationship and the lowest

relationship is -0.55 of SCB. In average EPS is highly co-related with MPS

and DPS is least correlated with MPS of selected companies.

Similarly, to find out the impact of the combined effect of EPS, DPS and

NWPS on MPS, multiple regressions analysis has been conducted with

help of SPSS software. For this purpose r2 has been calculated which

denotes the combined effect of EPS, DPS and NWPS on MPS. As per the

calculation, the highest co-efficient of determination (r2) of UFL is 98.9%

which means the MPS of UFL is mostly influenced by the combined

effect of EPS, DPS and NWPS among the all selected listed companies

during the study period. Only 1.10% variation in MPS is due to the other

extraneous factors. Similarly the lowest co-efficient of determination (r2)

is 46.20 % of PFL which indicates that the MPS of the PFL is least

influenced by combined effect of EPS, DPS and NWPS among the all

selected listed companies. 53.80% variation in MPS of the Company is

influenced by the other external factors. The co-efficient of

determination(r2) of whole selected companies which is 60.3%, shows

that in average, the MPS of the companies are influenced by the

combined effect of EPS, DPS and NWPS and this relationship is also

statistically significant at 5% level of significance.

The next objective of the study is about the identification of the price of

stock whether it is over priced, under priced or equilibrium priced. To

find out the pricing status of stocks, actual rate of return and required

rate of return was compared. Generally, the trend is that the MPS of

public quoted companies is above their book value. The market value is

determined by the supply and demand functions. However, in an

efficient market MPS fully reflects all the historical information publicly

available. As per the presentation, the highest required rate of return is

31.56% of Everest Insurance and the lowest required rate of return is

10.89% of Himalayan Bank Ltd. Similarly, in case of actual rate of return,

NB bank has highest return that is 61.86% and the lowest is 19.36% of

Himalayan Bank Ltd. From the comparison it has been found that actual

103

rate of return is higher than the required rate of return of 9 selected

companies out of 10. Only one HGI company’s actual rate of return

(29.45%) is less than the required rate of return (30.97%). It reveals that

the stock price of 9 companies out of 10, are under priced and the only

Himalayan General Insurance Company’s stock price is found over priced

during the study period. Similarly, none of the sample companies’ stocks

are found to be equilibrium priced. The main reason for under-valuation

of the stock of the sampled companies is that the price of the stock had

reached the highest point during the study period of the banking and

financial companies. But the NEPSE index did not follow the same speed

and the rate of Treasury bill issued by NRB also heavily decreased during

the study period. It makes the actual rate of return of the sampled

companies high and the required rate of return low. So, most of the

sampled companies’ share price become undervalued during the study

period.

Signaling and informational factors also play the major role in the pricing

of the security in secondary market. But it depends on the events

occurred in the country. To find out the signaling and informational

effect on share price, paired T-test was conducted to get the result of

third objective of the study. For this purpose five major events occurred

during the last year of the study period in the country has been taken

and hypothesis was set whether the events have influenced the NEPSE

index or not. As per the calculation three null hypothesis were accepted

which means the NEPSE index was not affected by the three

corresponding events of Ashwin-18, 2059, Rupture of peace talk and

starting of re-war at Bhadra -10, 2060 and the event of Nepal’s entry in

WTO at Sep-11, 2003 respectively. Similarly, the remaining two null

hypotheses were rejected. It shows that the two events, ceasefire on

Magh-15, 2059 and the event of five major political parties’ movement

have influenced the NEPSE index.

The decision for investment largely depends on the information about

the performance of the company. In general, most investors prefer to

104

buy shares of those companies whose earning are very attractive and

dividend pay out ratio is high. However, rational investor analyzes not

only earnings but also various information regarding the companies’

management and their dividend policy, economic situation, market

condition and many other factors before actually making an investment.

But as per the questionnaire analysis, it is found that most of the

investors invest in shares for dividend and price appreciation and most

of them are not interested about the other indicators which could affect

the price of share. It also seems from the questionnaire analysis that the

investors are conscious about the market price of the share they have

bought as many investors seek for their share’s price daily or weekly.

Although they seek for their share price, most of the investors are not

trading their shares in secondary market, which shows that most of the

investors are holding their shares for only dividend and they are not

using the change in share price for speculative purpose.

6.2 Conclusion:

The study shows that in average market price of share of the sampled

companies are seems to be influenced by the combined effect among

the analyzed financial indicators like EPS, DPS and NWPS. However

current year's dividend has minimum role in the fluctuation of the

market price. But these indicators are not alone to influence the price of

share and there are other external factors such as economic situation,

economic growth, political situation and other major events occurred in

the country are also responsible for the pricing behaviour of the stock of

the sample companies. Among the analyzed financial indicators EPS

seems to be most closely related with the market price of share. Most of

the sample companies’ stock price found to be under valued because

their required rate of return is lower than the actual rate of return. This

happens because of the decreasing trend of the risk free rate of return

which causes the required rate of return lower and the increasing trend

105

of the price of the sampled companies which makes the actual rate of

return high.

Similarly, the study also shows that the some major events occurred in

the country also effect on the market price of share. So, the political,

economical and social environment has also close relationship with the

pricing behaviour of share and they influence the stock market with

respect to the importance of the event. The study also shows that

Nepalese investors are more conscious towards the dividend and price

appreciation of the shares they are investing but most of the investors

are only using buy and hold strategy as only few of them are trading

their shares in secondary market. This shows that there lacks

professionalism in Nepalese investors.

6.3 Recommendations:

The findings of the study may be an important information for those who

concern, directly of indirectly, with the stock market activities. Thus, the

following recommendations can be outlined for the concerned:

1. From the study it seems that Nepalese investors have limited

knowledge about security market. It lacks of professional

investors. So, the concerned authority is recommended to make

aware about the security market to the general public so that they

are interested to invest in security market and the previous

investors could change as professional investors.

2. Most of the stocks of banking and finance companies are

undervalued in the stock market. So, investors are recommended

to buy these undervalued stocks by selling other overvalued

stocks.

3. As per the study, investors are trading the stocks with-out proper

analyzing of the financial indicators of these companies. So,

investors are recommended for the detail study of the financial

106

indicators of those companies before trading the stocks of such

companies.

4. The price fluctuating trend is not predictable by general investors.

So, investors are recommended to get the consultancy service

from the investment experts while making the investment.

5. Signaling factors should be analyzed on regular basis by the

concerned authority so that the future movements of price can be

predicted from the side of analyst and investors.

107

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