The Impact of Financial Performance of the Company on its Share Price; Evidence from Pakistan Stock Exchange

2) The higher ratio of Debt to Total Equity may result to the lower of the debt credit rating. The lower of the credit rating will result to increase of the interest rate which will cost more to the company.

Equity ratio and debt ratio are both designing for capital structure and they are negatively related with each other. The cost of equity is higher than the cost of debt, but shareholders will not require companies to repay them dividends and principals any time. However, companies must pay the debt holders interests and principals each year. And increasing leverage ratio will result in increasing the return to shareholders, yet at the same time, it will increase the repayment commitments and then raise the risk to company and shareholders.

The three-year SAIC stock price data and its corresponding SSE index are obtained from finance.yahoo.com, as it provides dividend-adjusted closing prices. The two data are ordered in time in Excel (Sort Ascending). It is found that 46 SAIC daily stock prices are missing due to suspension of trading, therefore; 46 corresponding SSE daily index are removed in order to match up dates on the two data series.

The capital structure of a company changes the risks exposure highlighting the need to determine the impact of debt levels on financial risk (Pearson Learning, 2014). The dividend payout is the ratio of dividends per share to the earnings per share, and both ratios increased for the three years. The increase in the DPS rose at a decreasing rate resulting in slower growth in the dividend payout. The dividend per share is dependent on the total number of dividends paid out in an interim year, and the increase in the DPS was in line with the management’s efforts to reward the investors as the earnings improved. The dividend yield representing the dividend paid out relative to the share price, and the lower divided yield in December 2014 can be attributed to the higher share price hovering over $40, which was more than double the share price in the previous

Investment in shares of corporate stock is also very popular that can produce a great amount of profit. By investing in shares of a firm listed on a stock exchange, the investor owns part of the company and also gets the right to share in the future income of the company. Returns on stock come in two ways; first, dividends are paid out of the profit accumulated by the company over a year. Secondly, the investor can sell his or her shares of stock for more than originally paid. Gains may reflect that the company over time has grown or improved or that the investment society sees future prospects. But then capital losses can also occur. The price of shares listed for a company can vary from day to day. On a given day some shares may go up in value and some may go down in vale, depending on how investors view the prospects of each company. Also rises and falls in economic confidence or changes in a particular industry may cause the value of stocks to rise or either fall. There are ranges of factors, which influence stock prices on a daily basis stocks cannot be accurately predicted. Shares of stocks are riskier than

Debt ratio - The Debt/Equity ratio is a measure of a company's financial leverage and indicates what proportion of equity and debt the company is using to finance its assets. A high number indicated that the company is

In 2008, share prices dropped mainly due to the US sub-prime crisis, which started in 2007 (Lixi, 2008). This had a huge impact on the P/E ratio for 2008, which is slightly below the threshold of 10 times. The P/E ratio for ANZ was higher than NAB in 2009 and there was lesser fluctuation in ratio. Share prices tend to rise with improved economic conditions, and with stimulus packages being distributed all over the world, there was uplift in the global economy, hence driving share prices (Larsen, 2012). However, falling earnings over 2009 caused both P/E ratios to rise. NAB’s P/E ratio increased a significant amount and overtook ANZ’s. Over the 5 years, NAB’s P/E ratio fluctuation is observed to be consistently higher than ANZ’s. Moreover, NAB’s higher P/E ratio might be due to investors’ high expectations, which were not supported by earnings.

The premise of an efficient market is that stock prices adjust accordingly as information is received. The speed and accuracy of the pricing changes are a reflection of the strength of the market efficiency, where in theory a perfectly efficient market will re-adjust prices immediately and precisely with new information. The efficient market hypothesis aligns with beliefs about whether technical and fundamental analyses are useful in making investment decisions or whether a passive approach is appropriate. In a perfectly efficient market, these types of analyses are not able to predict stock price trends (based on market inefficiencies or price abnormalities) which could assist in portfolio positioning or investment management. However, some investors belive that the market pricing is not precise and that there are timing windows and pricing trends that can be identified through analysis of past performance and finding price abnormalities where all information is not correctly reflected in the stock price (Hirt, Block and Basu, 2006).

As depicted in the above table, the initial return on equity (ROE) ratio indicates both Caterpillar’s and CNH Global’s profitability in terms of the stocker’s return as it relates to company profits and total equity (Smart, Gitman, & Joehnk, 2014). While it is an important tool for investors when comparing multiple historical values for a company, one cannot determine the reasoning’s behind its increase or decrease when solely examining its value alone. Therefore, the utilization of the expanded ROE equation known as the DuPont formula (located at the bottom of the table) provides an explanation by including each companies’ profit margin (PM), total asset turnover (AT), and equity multiplier (EM). Consequently, each component plays a significant

The 2008 global financial crisis (GFC) (Shah 2009, p. 25) has caused the share prices of BHP, CBA and TLS to drop rapidly from 2008 to 2009, apparent from the 10-year historical data of the three companies’ share price (Appendix 1). This shows that the all three companies’ share prices are influenced by the GFC, which means the GFC has the similar result in the calculation of three stocks’ expected return. Hence, the data from that period are included in the data choice.

The Debt-Equity Ratio shows that most of the capital was in terms of ordinary shares and is becoming more reliant on Shareholders Equity than on debt to finance operations.

7. Hypothesis Testing: The formulated hypothesis in the study that whether abnormal returns are generated by stock split was tested by conducting paired sample t test using SPSS for the sample of companies for period ranging from -60 to +60 days. The two variables compared were the normal returns and the expected returns ( based on BSE returns)

As indicated by the case study S&P 500 index was use as a measure of the total return for the stock market. Our standard deviation of the total return was used as a one measure of the risk of an individual stock. Also betas for individual stocks are determined by simple linear regression. The variables were: total return for the stock as the dependent variable and independent variable is the total return for the stock. Since the descriptive statistics were a lot, only the necessary data was selected (below table.)

The dividend policy such as the payment of dividend affects the market price of share. If there is a debate in this issue, this theory is commonly accepted. In this report the relationship between dividend and the market price of share is proved in the banking sector of Bangladesh. But it is also revealed that

To increase and maximize the wealth/value of shareholders, it is necessary that the company is competitive in their market and can reliably “earn a considerable return on its investments above their cost of capital” (Doyle, 2000). The increasing rates of return of well performing companies attract new investors who invest money to become shareholders. These outside funds from investors are essential for growth of businesses and the expansion into new markets. Measurements of generated shareholder returns over a certain time period deliver the company useful information on whether their objectives have been achieved or should be new adjusted (Atrill, 2009).