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8/3/2019 Impact of Financial Per for Mane on Share Prices.
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IMPACT OF FINANCIAL PERFORMANCE ON THE SHARE PRICES PERSPECTIVE
FROM PAKISTAN TEXTILE SECTOR
Tayyaba Gul Akram
Ms. (finance)
IBA Punjab University Lahore
Dr. Ehsan Malik
Director, Institute of business Administration,(IBA)The University of Punjab, LahoreRana Shahid Imdad Akash
Ph.D (Finance Scholar), International Islamic University Islamabad
Email: [email protected]
Marriam Ghafoor
Ms. (finance)
IBA Punjab University Lahore
Huma Iftikhar
Ms. (finance)
IBA Punjab University Lahore
Abstract:
This paper is attempted to determine the impact of financial performance on share prices of the
company in textile sector of Pakistan. We examine the relevant financial determinants of the
companys financial data. . The methodology of the Research in this research took the form of
the secondary data that is the summary of finance (annual report). In this study, we examine 23
firms in the textile sectors listed at the Karachi Stock Exchange for the period 2004-2010 using
descriptive statistics. Six repressors i.e. EPS, returns on assets ,returns on equity, price earning
ratio, net profit margin debt to equity were employed to see the effect on share prices Technical
the analysis by using SPSS, the testing of the research hypothesis with the test t and the F test .
The conclusion that was received in this work is that the selected 6 financial independent
variables significant towards the price of the share in textile sector.
Keywords: share prices, financial performance
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1. Introduction:
Stock price maximization is the most widely accepted objective of listed firms worldwide. The
entire corporate decision-making framework revolves around this comprehensive framework.
The metrics of financial performance are important in the corporate and investors' decision-
making to the extent they influence the stock prices.
Accounting information from financial reports can describe firms condition. Two factors, affect
the financial reports the firms activities and accounting system adopted by the firms. There are
many researches in value of financial reports information (both annual and interim reports). In
predicting firms future financial performance some researches study accounting information,
such as earnings and growth while other researches assess the effect of accounting information
on share price.
Nowadays, a large amount of information is available for investment and research analysis.
Researchers and investors can easily get access to such valuable information through various
channels on the Internet. For example, a companys financial report, which provides accounting
items and financial ratios, is an important indicator of financial performance. More importantly,
within stock market research, it is believed that the information from quarterly reports and
annual reports can influence the price of a stock, especially for unforeseen earnings or
unforeseen loss surprises. The information is likely to be in different formats, which are
quantitative and qualitative data. In particular, a companys quarterly and annual reports are
good examples of documents that contain both quantitative and qualitative data. Financial reports
provide information that is important for the investor because these reports reflect the financial
performance of the companies. Financial performance is the measurement of the success from
business. The performance of the management and the operational activity that are good could
increase the net profit so as to make the price per the share become high. In investing their
capital, investors consider the companies which have good stable performance. So the demand
increases for the shares of that company, ultimately increasing the share prices.
The Pakistan textile industry contributes more than 60 percent to the countrys total exports that
sum around 5.2 billion US dollars. The industry contributes approximately 46 percent to the
total output produced in the country. In Asia, Pakistan is the 8th largest exporter of textile
products.The contribution of this industry to the total GDP is 8.5 percent. Moreover, it provides
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employment to 38 percent of the work force in the country, which amounts to a figure of15
million. So it is the most important sector for research purpose. There are many listed textile
companies on KSE.
2. Literature review:
Erni W., Prof. Suryadi H. S. SSi (2009) studied the analysis of financial performance andthe effect on share price on the company lq45 available in Indonesia stock exchange by
using the secondary data from the financial reports of the companies that were registered
to the Indonesian Stock Exchange in the period 2004 up to 2008. Conclusions obtained in
this paper that the financial performance of the eight independent variables are partially
an effect on stock prices of agricultural sector (PBV), mining (PBV & PER), basic
industry & chemical sector (ROA & PBV), various industry sectors (no), consumption
goods industry sector (PBV & EPS), the property sector (PBV), the infrastructure sector
(PBV & EPS), the financial sector (ROE & EPS), and the trade sector (no). As for the
effect of simultaneously, only the trade sector alone is no effect from 8 ratio used.
Michael A., Barry T., Mohammad S. (2010) studied the impact of the pursuit ofsustainability on the financial performance of the firm by taking the 20% of the 600
biggest North American companies in terms of sustainability driven companies in 57
different industry sectors. And the result show that the evidence from the sample suggests
That There Is No Statistically Significance Difference In The Mean Percent Change In
Stock price between the two groups. The sample evidence supports the theory that the
corporate sustainability label has no statistically significant impact on the financial
performance of firms.
HusamAldeen Al-Khadash, Mete F. (2006)studied the Impact of Strategic Initiatives inManagement Accounting on Corporate Financial Performance.The industrial companies
sector was selected and 56 companies wereinvestigated. The results shows that As
management accounting continues to evolve and become more involved in the strategic
management of the firm, it is important for management accountants to understand not
only how to account for strategic initiatives (e. g., tqm), but also how these initiatives
should be implemented and managed to achieve maximum benefit for the firm.
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James A.G., David T.W., Theodore S.,Shigeo A. (2002) studied that If AccountingEarnings or Free Cash Flows Provide a Better Estimate of Capital Gain Rates of Return
on Stocks by taking the sample size of the American companies ranged from 881 to 1034,
while the Japanese sample ranged from 166 to365.The study found strong support for
using the net earnings approach to explain the capital gain rates of return for both
American and Japanese companies during the period 1981-99 and 1986-99, respectively.
Additionally the study found strong support for the relationship between capital gain
returns and net cash flows associated with operations, interest and debt financing.
Sujata K. (2009) studied the impact of dividend policy on shareholders value of Indianfirms on three sectors IT, FMCG and Service sector. Data used was the dividend
announcement dates in each of the sector respectively from 2001 to 2008 comprising of
168 dividend announcements dates in IT sector and 199 and 202 dates in the FMCG and
service sector respectively. Estimation window of 150 days was chosen. It was concluded
that Factor of dividend signalling and ownership, liquidity ratios are significantly
negatively related with DP ratio. Also a positive significant relationship exists between
RE earnings and DP ratio. This shows that in IT sector capital gains are preferred are
cash dividends. The information environment is highly symmetrical. Therefore, cash
dividends are not used to signal their profitability to shareholdersthat thecapital gains are
preferred to cash dividends, and there is negative and significant relationship between DP
ratio and Factor of liquidity, firm size, growth & expansion.
Mehdi S.(2008)examined the impact of the introduction of Shariah-compliant Index (SI)by Bursa Malaysia on the performance and liquidity of included shares by using data of
daily stock prices, bid-ask spread and volume of trade for 188publicly traded companies
in our sample, which were collected from DataStream. The findings provide evidence of
significant negative abnormal returns from 15 days prior to the event to 15 days after the
event. Over longer periods cumulative abnormal returns become positive and increase
over time.
Kevin B.H. and Vinod R.S. (2003) studied the impact of business excellence on financialperformance. The data consisted of two phases, the post-implementation period the
implementation period using the sample consisted of 600 winner companies Stock market
portfolio. The results found in this study showed that When Business Excellence is
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implemented effectively, financial performance improves dramatically. Business
Excellence improves profitability, leads to higher growth, and improves efficiency.
Furthermore, they provide additional validity to the winners share price performance
shown.
Dwi M., Mulyono, Rahfiani K. (2009) studied to examine the value relevance ofaccounting information in explaining stock return. The study used profitability, liquidity,
leverage, market ratio, size and cash flow as proxies of accounting information. This
research used secondary data from financial statements. The samples of the study were
listed companies in manufacturing industries that actively trading between2003-2006 in
Indonesia Stock Market. Results show that financial ratios, firm size, and cash flow from
operating activities altogether affect market adjusted return and abnormal return. The
return variability is best explained by second quarter report. This research also exposes
that the movement of stock price is affected much by factors other than firms financial
performance.
Anthony J.T., Ming-ChihL.,Rung-Tai K.,Kuo-Tay C., (2010)proposed an effectiveclustering method, HRK (Hierarchical agglomerative and Recursive K-means clustering),
to predict the short-term stock price movements after the release of financial reports by
gathering financial reports and financial ratios from the EDGAR database, focusing on
the companies listed in the S&P 500 index as of Sep. 30, 2008, and collected all available
quarterly and annual reports released from Jan. 1, 1995 to Dec. 31, 2008.The
experimental results show that HRK outperforms SVM. Besides, the performance of
considering both qualitative and quantitative features in financial reports is better than
that of only considering the qualitative or quantitative features.
Porter and Ketels (2003) noted that there is little systematic evidence on the impact ofthe UK financial market on UK companies strategy and investment choices.Using the
secondary data of company accounts from Thomson Financial DataStream. data from
published accounts for an unbalanced panel of 850 companies whose shares are listed on
the London Stock Exchange, over the period 1990-2000.Results found in this research
work are that other investors have become much more active in monitoring management
and enforcing change through engagement. The analysis shows that R&D firms are more
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JSX only 13 acres Used as samples for this study. The result of this study using multiple
regressions that finds only two variables (return on assets and current ratio) that
significantly affect the Following year stock return with the level of significance 5
percent.
Jonathan Lewellen, studies whether financial ratios like dividend yield can predictaggregate stock returns. Predictive regressions are subject to small-sample biases, but the
correction used by prior studies can substantially understate forecasting power. I show
that dividend yield predicts market returns during the period 19462000, as well as in
various subsamples. Book to market and the earnings-price ratio predict returns during
the shorter sample 19632000. Initial tests produced strong evidence that market returns
are predictable, but subsequent research has argued that small-sample biases explain the
bulk of apparent predictability. The accumulated evidence suggests that DY; B=M; and
E=P have, at best, weak power to predict returns.
Hypothesis: According to present literature we can assume that:
y There is positive relationship between financial performance and share prices of 23selected textile companies listed in Karachi stock exchange.
y Profitability, earnings, returns of assets, business excellence financial ratios, firm size,and cash flow from operating activities altogether affects Share prices traded in stockexchange.
4. Descriptive Statistic:
To examine the relationship between variables statically behavior of data is examined by
employing Descriptive statistics. Descriptive statistics is performed to examine the data
distribution to account for Mean, Median, and Standard deviation, Minimum and Maximum
Range, Variance. It is helpful to establish an opinion about the behavior of time series.
Correlation analysis is needed to identify the correlation between dependent and independent
variables i.e., share prices, debt to equity, price earning ratio, earning per share, return on assets,
return on equity and net profit margin .However it is a weaker measure to identify the
relationship and not an absolute measure to proved cause and effect relationship.This study
makes use of linear regression analysis.
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Shareprices= o+1(EPS)+2(NPM)+3(ROA)+4(ROE)+5(P/E)+6(DtoE)+
Where
Share prices= Share prices
EPS = earning per share
NPM = net profit margin
ROA = return on assets
ROE= return on equity
P/E = price earning ratio
DtoE= debt to equity
=error term
Descriptive statistics for all variables is calculated and presented in Table 1, debt to equity, price
earning ratio, earning per share, return on assets, and return on equity and net profit margin the
summery of statistics of all this is given in table1.
Table 1.Descriptive Statistics (7-year summary).
Descriptive Statistics
N Minimum Maximum Mean Std. Deviation
SHAREPRICES 161 .00 966.17 59.6604 128.42727
EPS 161 -287.20 155.50 6.4953 34.93092
PEARNING 161 -639.60 393.86 5.6057 70.04495
NPM 161 -62.70 19.90 .2702 8.78492
ROA 161 -32.50 13.54 .6201 6.46755
ROE 161 -1281.40 255.60 -5.0125 105.81413
DtoE 160 .00 57226.00 6.1575E2 4508.84485
Valid N (list wise) 160
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5. Empirical Results:
The determinants of financial performance i.e. Debt to equity, price earning ratio, earning per
share, return on assets, return on equity and net profit margin effect on share prices was analyzed
through regression. The regression equation is used to test the selected variables. The results are
given in relevant tables.
Regression:
Table2. Regression Coefficients and Significance
Model
Un standardized Coefficients
Standardized
Coefficients
t Sig.B Std. Error Beta
1 (Constant) 58.543 10.965 5.339 .000
EPS .528 .328 .143 1.611 .109
PEARNING -.007 .147 -.004 -.045 .964
NPM .687 1.703 .047 .404 .687
ROA -1.288 2.614 -.065 -.493 .623
ROE -.095 .405 -.078 -.234 .815
DtoE -.003 .009 -.117 -.371 .711
a. Dependent Variable: SHAREPRICES
Interpretation of Regression:
As table shows r square is 0.02 f value is 0.06 with DF = 5 calculated as (c-1) and p value is =
0.688 which is greater than 0.05 which shows that the relationship is non significant so there is
no significant relationship between financial performance and share prices of the selected textile
companies. So findings stated that there exists a positive relationship.
The value of Predictors: (Constant), debt to equity, price earning ratio, earning per share, return
on assets, return on equity with co-efficient value with 0.140 which is greater than 0.05 which is
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non significant so there is relationship between predictors or independent variables and share
prices which is dependent variable.
Table2.1
. Regression Model Summary
Model R R Square Adjusted R Square
Std. Error of the
Estimate
1 .144a .021 -.018 129.95902
a. Predictors: (Constant), Dto E, PEARNING, EPS, NPM, ROA, ROE
ANOVAs
Model Sum of Squares df Mean Square F Sig.
1 Regression 51730.846 5 10346.169 .616 .688a
Residual 2586821.342 154 16797.541
Total 2638552.188 159
a. Predictors: (Constant), debt to equity, price earning ratio, earning per share, return
on assets, return on equity
b. Dependent Variable: SHAREPRICES
Interpretation of ANOVA:
AS ANOVA table shows that the Sum of square is = 25.34, Means square = 16.54, F value is
=0.616, P value is = 0.688, DF value is = 5 as the results shown p value is 0.688 and f value is
0.616 which is greater then 0.05so the relationship shows positive trends between DV&IV.
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Correlations
SHAREPRICES EPS PEARNING NPM ROA ROE DtoE
SHAREPRIC Pearson
Correlation1 .131
*.000 .057 .034 .037 -.037
Sig. (1-
tailed).049 .498 .237 .336 .320 .321
N 161 161 161 161 161 161 160
EPS Pearson
Correlation.131
*1 .016 .366
**.406
**.128 -.052
Sig. (1-
tailed).049 .420 .000 .000 .053 .257
N 161 161 161 161 161 161 160
PEARNING Pearson
Correlation.000 .016 1 .037 .006 .007 -.006
Sig. (1-
tailed).498 .420 .319 .471 .463 .470
N 161 161 161 161 161 161 160
NPM Pearson
Correlation.057 .366
**.037 1 .721
**.365
**-
.274**
Sig. (1-
tailed).237 .000 .319 .000 .000 .000
N 161 161 161 161 161 161 160
ROA Pearson
Correlation.034 .406
**.006 .721
**1 .497
**-
.383**
Sig. (1-
tailed).336 .000 .471 .000 .000 .000
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N 161 161 161 161 161 161 160
ROE Pearson
Correlation.037 .128 .007 .365
**.497
**1
-
.960**
Sig. (1-
tailed).320 .053 .463 .000 .000 .000
N 161 161 161 161 161 161 160
DtoE Pearson
Correlation-.037 -.052 -.006
-
.274**
-
.383**
-
.960**1
Sig. (1-
tailed).321 .257 .470 .000 .000 .000
N 160 160 160 160 160 160 160
*. Correlation is significant at the 0.05 level (1-tailed).
**. Correlation is significant at the 0.01 level (1-
tailed).
Interpretation of co-relation:
Co-relation shows positive relationship between DV &IV at 0.05 levels which is non significant.
Our empirical tests results provide. A positive relation is found between financial performance
and stock price.
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CONCLUSION:
The conclusion that was received in this research work is that our hypothesis proves significant
influence between DV &IVs.The evidence from the sample suggests that there is statistically
significance difference in the mean percent change in stock price. Debt to equity, price earning
ratio, earning per share, return on assets, return on equity and net profit margin activities
altogether affect the price of shares but stock price is affected by some other factors although
stock price is a good indicator of performance. Based on overall findings the model empirically
accepted & signifies the fact.
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