ABSTRACT
This
study examined the influence of financial ratios on stock market prices of banks
in Nigeria; specifically, the study aims at (i) determining
the extent to which Return on Assets affects stock prices of quoted deposit
money banks in
Nigeria (ii) examining
the predictive power of Cash Deposit Ratio on stock prices of quoted deposit
money banks in
Nigeria (iii) investigate if Debts to Total Assets Ratio influences
the stock prices of quoted deposit money banks in Nigeria (iv) find out
the effect of Net Asset Per Share on stock prices of quoted deposit money banks
in Nigeria
(v) evaluate the relationship between Earnings per
Share and stock prices of quoted deposit money banks in Nigeria. The
study adopted the ex-post-facto research design and data covering 7-year period
2009-2015 were collated from annual reports of banks and the Nigeria Stock Exchange
daily official list. Panel multiple regression was used to estimate the
relationship between these financial ratios and stock prices. Stock prices were
adopted as the dependent variable, while the independent variables included
Return on Asset (ROA), Cash Deposit Ratio (CDR), Debts to Total Asset Ratio
(DTAR), Net Assets Per Share (NAPS) and Earnings Per Share (EPS). The result
emanating
from this study revealed the following: (i) returns on assets
had about 47% correlation with stock price, suggesting a positive but
statistically insignificant association with stock prices of selected banks in
Nigeria (ii) cash deposit ratio showed a negative and significant association
with stock price with a beta coefficient of -0.8531 (iii) debt to assets ratio
showed a negative effect on stock prices and this association fails to be
statistically significant at 5%. The beta coefficient was -0.7294 (iv) The
relationship between net asset per share with stock prices negative coefficient
of -0.0137. The result was not statistically significant at 5% level of
significance (v) Earnings per share (EPS) was found to have a significant and
positive association with stock prices of money deposit banks and the
statistical significance is within the acceptable bound of 5%. The beta
coefficient of EPS was 0.1170. The study therefore recommends among others that
financial analysts and prospective investors should rely on earnings per share
and cash deposit ratios in predicting the behavior of stock prices in Nigerian
banks, and that government, policy makers, accounting standards setters and the
monitoring authorities should require listed firms to disclose accurate,
relevant and sufficient information in their financial statements, as these
information affect stock price movements, and are guides to financial analysts
and prospective investors in making rational investment decisions.
.
TABLE OF CONTENTS
Cover
page i
Title
page
ii
Declaration
iii
Certification
iv
Dedication v
Acknowledgements vi
Abstract
vii
List
of Tables xii
CHAPTER 1: INTRODUCTION
1.1 Background
to the Study 1
1.2 Statement
of the Problem 3
1.3 Objectives
of the Study 4
1.4 Research
Questions 4
1.5 Research
Hypotheses 5
1.6 Significance
of the Study 5
1.7 Scope
and Limitation of the Study 6
1.8 Operational
Definition of Terms 6
CHAPTER
2: LITERATURE REVIEW
2.1 Conceptual
Framework 8
2.1.1 Financial
Ratios 8
2.1.2 Financial
Ratio Analysis 8
2.1.3
Returns on Assets 10
2.1.4
Cash Deposit Ratio 10
2.1.5
Debts to Total Assets Ratio 11
2.1.6
Net Assets Per Share 11
2.1.7 Earnings Per Share 11
2.1.8
Objectives of Financial Statements Analysis 12
2.1.9
Advantages of Ratio Analysis 13
2.1.10
Significance of Financial Analysis to Stakeholders 15
2.1.11 Types
of Financial Ratio Analysis 17
2.1.12 Profitability Ratios 19
2.1.13 Liquidity Ratios 22
2.1.14 Credit
Risk/Solvency Ratios 24
2.1.15 Efficiency Ratios/Assets Management
Ratios
28
2.1.16 Valuation Ratios/Investment Ratios 34
2.1.17 Cash
Flow Indicators Ratios
39
2.1.18
Limitations of Using Financial Ratios 44
2.1.19
Concept of Stock Price 46
2.1.20 Stock
Price Determination 47
2.1.21 Stock
Price Movements and Monetary Variables 50
2.1.22 Stock
Market Development and Economic Growth 52
2.1.23
Nigerian Stock Market Experience 53
2.2 Theoretical framework 57
2.2.1 Random
Walk/Efficient Market Hypothesis 58
2.3
Empirical Review 59
2.4 Summary
of Literature Review 87
CHAPTER
3: METHODOLOGY
3.1
Research Design 88
3.2
Population of the Study 88
3.3
Sample and Sampling Technique 88
3.4
Method and Sources of data collection 89
3.5
Research Variables and Measures 89
3.5.1
Dependent Variable 89
3.5.2
Independence variables 90
3.6
Model Specification 91
3.7
Data Analysis Techniques 91
CHAPTER 4: DATA
PRESENTATION AND ANALYSIS
4.1
Descriptive Analyses
92
4.2
Panel Unit Root Test at First
Differencing 94
4.3
Panel Cointegration Analysis
95
4.4 Granger
Causality Test 96
4.5 Test
of Hypotheses 99
4.5.1 Hypothesis I
100
4.5.2 Hypothesis II 102
4.5.3 Hypothesis III 103
4.5.4 Hypothesis IV 105
4.5.5 Hypothesis V 106
CHAPTER 5: SUMMARY, CONCLUSION AND
RECOMMENDATIONS
5.1
Summary of Findings
107
5.2 Conclusion 108
5.3
Recommendations 108
5.4
Contributions to Knowledge 109
5.5
Suggestions for Further Studies 110 References 111
Appendices 120
LIST
OF TABLES
2.1 Summary
of Empirical Review 80
4.1 Results
of Descriptive Statistics 92
4.2 Results
of Panel Unit Root Test 94
4.3 Panel
Cointegration Test Results 96
4.4 Granger Causality Test Results 97
4.5 The Hausmann Test Results 100
4.6 Panel Fixed Effect Multiple Regression 101
CHAPTER
1
INTRODUCTION
1.1 BACKGROUND TO THE STUDY
Investments
in the stock market require sufficient and adequate knowledge and understanding
of the environments surrounding the stock market. It is needful for an investor
and a potential investor to have this understanding because of the associated degree
of risk involved in investment decisions. Risk is an element or probability
that the unexpected may occur and adequate precaution ought to be taken to
forestall it. In view of the possibility that an investor may lose his
investments, it is essential to assess or evaluate investment opportunities to
minimize the occurrence of this risk. One of the ways of evaluating the
potentials of an investment is through the use of financial ratios. Financial ratios are simply relationships
between two or more figures in the financial statements which ultimately give
direction as to the performance of the firm. These relationships are established to measure the success or
failure of managerial decisions in the light of the movement in stock prices. According to Remi (2005), the firm
stock prices have direct relationship with managerial efficiency, which is one
of the signals of firm performances.
Apart from satisfying legal requirements,
financial reporting is aimed at providing investors and analysts with the
information needed to assess the operational results and financial standing of
a firm for the purpose of making informed investment decisions. Stock prices often
times serve as the basis for the assessment of whether a firm is breaking even
or not. These prices are relevant metrics of returns to stakeholders, therefore
the value attached to them and their direction of movement matters so much to
both existing and prospective investors in the capital market. Over time,
financial ratios have been used as proxies to predict the stock market prices
of firms (Remi, 2005). This notwithstanding, many still question the efficacy
of financial ratios in predicting stock prices. The need to find out the extent
of the predictive power of financial ratios on stock prices in the banking industry
motivated the study.
Prominent among the classes of ratios used
to assess the risk, health, performance and status of a firm are profitability
ratios, liquidity ratios, solvency ratios, efficiency ratios, valuation ratio and
investment ratios (Lui & O’Farrell, 2009). These ratios are of paramount
importance to investors as they serve as a mirror to the investor. Investors
are not in a position to access the performance of the company in which they
are intended to invest without these ratios. Rational investors use those
financial ratios and other disclosures to assess the risk and the value of the
firm. This assists in a more rational investment decision.
Profitability ratios assess the
performance of an entity in terms of how much profit it can generate from its
operations. If a profitability ratio is relatively higher as compared to the
competitor(s) or industry averages, or previous years’ same ratios, then it is
taken as indicator of better performance of the bank. Liquidity ratios emphasize an entity’s
financial capacity to meet its cash and collateral obligations without
incurring unacceptable losses. The ability of an entity to efficiently meet
both expected and unexpected cash flows and collateral needs without adversely
affecting either daily operations or the financial condition of the institution
is of utmost importance. Inefficient liquidity management does not only reduce
profitability but may ultimately lead to financial distress in an organization.
Solvency ratios, otherwise known as gearing, debt, or financial leverage ratios
measure the extent to which a firm relies on debt financing rather than equity.
Equity valuation ratios are used by investors to
compare a stock's per-share price (market value) to its book value
(shareholders' equity).
In this study, Return on Asset (ROA), Cash
Deposit Ratio (CDR), Debts to Total Asset Ratio (DTAR), Net Asset per Share
(NAPS) and Earnings per Share (EPS) have been selected to represent financial
ratios. This is because an investor looks at the various aspects banks’
performance before investing his funds. These ratios were selected to cover the
major aspects of the banks’ performance usually considered by investors. The
study therefore evaluates the relationship between these ratios and stock
prices of deposit money banks in Nigeria.
1.2 STATEMENT OF THE PROBLEM
Banks in Nigeria operate under a turbulent economic environment,
characterized by massive deceleration in money supply and credit, poor asset
quality, undercapitalization, a weakening exchange rate, fluctuating inflation
rate, decline
in global oil prices, poor corporate governance, weak risk management framework,
shortage of foreign currencies and high cost of capital
(Adedoyin, 2011). However, a bank’s stock price is susceptible to all of these
factors which it has no control over. A section of the market participants has
attributed the trend in stock price movements to the availability of accounting
information while another camp of analysts opined that exogenous variables
(non-accounting information) sparked off by government’s loose monetary
policies is the formidable cause (Stephen and Okoro, 2014). However, from
literature there are several factors in share price determination in the
capital market; these factors are either accounting or non accounting
information (Khanagha, 2011; Cheng, Shamsher, and Annuar, 2008).
Several studies have shown that non-accounting parameters such as
speculation, gambling, and forced sales form the basis for the determination of
share prices (Cheng, Shamsher, and Annuar, 2008; Francis and Schipper, 1999). Incidentally, only few studies in Nigeria (Oyerinde,
2009; Umar and Musa, 2013) have attempted to provide empirical evidence of the relationship
between stock price movements and accounting information, and these few studies
are not specifically in the banking sector. This study which favours the
philosophy that accounting information serves as determinants of stock price
movement in the capital market intends to empirically investigate the extent to
which financial ratios influence stock prices in the Nigerian banking sector.
1.3 OBJECTIVES OF THE STUDY
This study examined the relationship between financial ratios and
stock price movements in deposit money banks in Nigeria. Specifically, the study
is to:
i. Determining
the extent to which Return on Assets affects stock prices of quoted deposit
money banks in Nigeria.
ii. Ascertain
the predictive power of Cash Deposit Ratio on stock prices of quoted deposit
money banks in Nigeria.
iii. Investigate
the influence of Debts to Total Assets Ratio to the stock prices of quoted deposit
money banks in Nigeria.
iv. Identify
the effect of Net Asset Per Share on stock prices of quoted deposit money banks
in Nigeria.
v.
examine the relationship
between Earnings per Share and stock prices of quoted deposit money banks in
Nigeria.
1.4 RESEARCH QUESTIONS
The
following research questions were posed for the study:
(i)
What
is the relationship between Return on Assets and stock prices of deposit money
banks in Nigeria?
(ii)
How does Cash Deposit Ratios influence stock prices of deposit
money banks in Nigeria?
(iii)
To
what extent does Debts to Total Assets Ratios affect stock prices of deposit
money banks in Nigeria?
(iv)
What
is the relationship between Net Asset Per Share and stock prices of deposit
money banks in Nigeria?
(v)
How does Earnings Per Share influence stock prices
of deposit money banks in Nigeria?
1.5 RESEARCH HYPOTHESES
Based on the objectives, the following hypotheses were
formulated:
(i)
There is no significant
relationship between Return on Assets and stock prices of deposit money banks in Nigeria.
(ii)
There is no significant
influence of Cash Deposit Ratio on
stock prices of deposit money banks in Nigeria.
(iii)
There is no significant
effect of Debts to Total Assets Ratio on stock
prices of deposit money banks in Nigeria
(iv)
There is no significant
relationship between Net Assets Per Share and stock prices of deposit money banks in Nigeria.
(v)
There is no significant
influence of Earnings Per Share on
stock prices of deposit money banks in Nigeria.
1.6 SIGNIFICANCE OF THE STUDY
Past studies on financial ratios and stock price movements have
concentrated on the developed countries. This study will contribute to
understanding of the interrelationships between financial ratios and stock
price movements in Nigeria, specifically in the banking sector. The findings of
this study will contribute to knowledge about the behavior of stock prices in
relation to financial ratios of listed deposit money banks in developing
countries like Nigeria. This information will provide financial institutions,
consultants, investors, analysts, and entrepreneurs with the necessary tools to
predict stock prices for rational investment decisions. The findings will also
provide information for policy makers involved in promoting investment. It will
also provide a basis for further research in financial ratios focusing on
developing countries. Specifically, the study is hoped to be of immense benefit
to the following stakeholders.
Scholars and researchers may also wish to use the findings of this
study as a basis for further research on these unresolved issues of optimal
financial decisions. It will guide the Capital Market Authority, and other
regulatory authorities in making regulations regarding data to be disclosed in
the financial statements for optimal investment decision. Findings of this
study are intended to provide shareholders and investors with information
regarding the determination of the market value of their investments. Potential
investors would also make use of the findings of this research to be able to
make more informed decisions, as they will be aware of the financial ratios to
look out for before they invest in a firm.
1.7 SCOPE AND LIMITATION OF THE STUDY
This study is
restricted to the determination of the relationship between financial ratios and
stock prices. The study is restricted to listed deposit money banks in Nigeria,
notwithstanding the fact that stock prices cut across all firms listed on the
Nigerian Stock Exchange (NSE). Four (4) financial ratios, each from the major
classes of ratios were computed from financial statements of banks for period
of seven years (2009 – 2015). The period covers from when deposit money banks
in Nigeria were mandated to operate a uniform financial year end (31st
December) to date.
Analyses
for this study are based on values obtained from the annual financial
statements of these banks and daily stock price list by Nigerian Stock Exchange
(NSE). The reliability of findings of this study is limited to the reliability
of these published values. Also,
only five ratios namely, Returns on Assets, Cash Deposit Ratio, Debts to Total
Assets Ratio, Net Assets Per Share and Earnings Per Share are examined.
1.8 OPERATIONAL DEFINITION OF TERMS
Stock Price: The highest amount someone is willing to pay for the stock, or the lowest amount that it
can be bought for.
Investment: An asset or item that is purchased with the hope that
it will generate income or will appreciate in the future.
Profitability:
The degree to which a business or activity yields profit or financial gain.
Liquidity: The measure of the ability of a debtor to pay its short-term
obligations.
Solvency: The ability of a corporation to meet its long-term obligations
Leverage: The amount of debt used to finance a firm's assets.
Efficiency: A level of performance that describes a process that
uses the lowest amount of inputs to create the greatest amount of outputs.
Ratio: The quantitative relation between
two amounts showing the number of times one value contains or is contained
within the other.
Return on Assets: An indicator of how profitable a company is relative
to its total assets.
Cash to Deposit ratio: The ratio
of how much a bank lends out of the deposits
it has mobilized.
Debt
to Total Assets Ratio: The percentage of total assets that are financed by creditors, liabilities, debt.
Net
Asset Per Share: An expression for net
asset value that indicates the value per share for a fund or a company.
Earnings
Per Share: This is the ratio of the
conversion of the naira amount of profit to a per share basis.
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