Factors Affecting Share Prices

Topics: Regression analysis, Stock market, Capital asset pricing model Pages: 21 (7429 words) Published: April 16, 2013
International Research Journal of Finance and Economics ISSN 1450-2887 Issue 30 (2009) © EuroJournals Publishing, Inc. 2009 http://www.eurojournals.com/finance.htm

Determinants of Equity Prices in the Stock Markets
Somoye, Russell Olukayode Christopher Dept. of Banking & Finance, Faculty of Management Science Olabisi Onabanjo University, Ago Iwoye, Nigeria P.O. Box 1104 Ijebu-Ode, Ijebu-Ode, Ogun State, Nigeria E-mail: kayodesomoye@yahoo.com Akintoye, Ishola Rufus Dept. of Accounting, Faculty of Management Science Olabisi Onabanjo University, Ago Iwoye, Nigeria E-mail: irakintoye@yahoo.com Oseni, Jimoh Ezekiel Dept. of Banking and Finance, Faculty of Management Science Olabisi Onabanjo University, Ago Iwoye, Nigeria E-mail: zikoseni@yahoo.com Abstract Brav & Heaton (2003) alleges market indeterminacy (a situation where it is impossible to determine whether an asset is efficiently or inefficiently priced) in the stock market. Kang (2008) argue that empirical tests of linear asset pricing models show presence of mispricing in asset pricing. Asset pricing is considered efficient if the asset price reflects all available market information to the extent no informed trader can outperform the market and / or the uninformed trader. This study examined the extent to which some "information factors" or market indices affect the stock price. A model defined by Al-Tamimi (2007) was used to regress the variables (stock prices, earnings per share, gross domestic product, lending interest rate and foreign exchange rate) after testing for multicollinarity among the independent variables. The multicollinarity test revealed very strong correlation between gross domestic product and crude oil price, gross domestic product and foreign exchange rate, lending interest rate and inflation rate. All the variables have positive correlation to stock prices with the exception of lending interest rate and foreign exchange rate. The outcomes of the study agree with earlier studies by Udegbunam and Eriki (2001); Ibrahim (2003) and Chaudhuri and Smiles (2004). This study has enriched the existing literature while it would help policy makers who are interested in deploying instruments of monetary policy and other economic indices for the growth of the capital market. Keywords: Stock prices, CAPM, models, coefficient, efficient, stock market.

International Research Journal of Finance and Economics - Issue 30 (2009)


1.0. Introduction
The price of a commodity, the economist makes us to believe is determined by the forces of demand and supply in a free economy. Even if we accept the economists’ view, what factors influence demand and supply behavior? Price? Yes, but not all the time, at least there are some other factors. In the securities market, whether the primary or the secondary market, the price of equity is significantly influenced by a number of factors which include book value of the firm, dividend per share, earnings per share, price earning ratio and dividend cover (Gompers, Ishii & Metrick, 2003). The most basic factors that influence price of equity share are demand and supply factors. If most people start buying then prices move up and if people start selling prices go down. Government policies, firm’s and industry’s performance and potentials have effects on demand behaviour of investors, both in the primary and secondary markets. The factors affecting the price of an equity share can be viewed from the macro and micro economic perspectives. Macro economic factors include politics, general economic conditions - i.e. how the economy is performing, government regulations, etc. Then there may be other factors like demand and supply conditions which can be influenced by the performance of the company and, of course, the performance of the company vis-a-vis the industry and the other players in the industry. In a study of the impact of dividend and earnings on stock prices, Hartone (2004) argues that a significantly positive...

Bibliography: 188
Rock, Kevin, (1986), “Why New Issues Are Underpriced”, Journal of Financial Economics, 15 Ross, Stephen A
Appendix I: Selected Market Indices (2001 - 2007)
International Research Journal of Finance and Economics - Issue 30 (2009)
Appendix II: Regression Analysis Of Selected Market Indices (2001 – 2007)
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