INTRODUCTIONBoosting 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 selfreliant 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. CHAPTER – 1 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. It has a vital role in promoting efficiency and growth. It intermediates the 1 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 Capital Market Non-Security Market Bank Deposit Business Venture Fixed Assets Other Sectors Security Market Equity Market Primary Market Secondary Market Debt Market Corporate Debt Market 2 Government Debt 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) ii) Technical Analysis 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 that cause the stock price fluctuation. Major of them can be classified as 3 government’s monetary policy.Evolving of E-transaction .Traditional Way of Transaction in NSE Out of these factors or variables the following major events or variables have been taken for analyzing as research variables: Event of “Ashwin-18.political factors.Sep-11 event Economic Factors . 2002)” 4 . political environment of the country etc.Government Monetary Policy . As a whole. socio-cultural factors and technological factors.Sep-11. 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.OTC market . Peace talk and rupture of peace talk and re-starting of war) .Maoist Insurgency .World-Wide Terrorism .Social Attitude and Beliefs toward Investment . economic factors.Maoist Insurgency (Cease fire.Information on Web . business volume and profitability position of the company or to the external factors like the economic condition of the nation.Ashoj-18.Investors’ Knowledge on Stock Exchange Technological Factors .Interest Rate and Inflation .Tax System .Dividend Policy and profitability of the Company . These variables may be closely related to the internal factors of the corresponding companies like the dividend policy of the company. 2059 (4-Oct.Present Economic Condition .2 : Factors Affecting Price of Securities -Dissolve of Parliament Political Factors .Nepal’s Entry in WTO . 2059 Event -5 Parties Movement .Fiscal and Monetary Policy Stock Market Price Socio-Cultural Factors -Traditional Investment Procedure of Nepalese . 2001 event of New York . these major factors (internal and external) that affect the price of the security can be presented on the following chart: Chart 1. Although Nepal’s capital market’s history is short. (SEOBNAnnual Report. Up to now. there has been major influence of rumors rather than strength of the companies. the concept of capital market is growing rapidly within a short span of time. Ceasefire on Magh 15. Dividend per Share (DPS) and last year's dividend.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. 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. manufacturing and processing and other various service sectors. 2059 (29-Jan. insurance services and participating in developmental works. 2003) and starting of peacetalk 5 major political parties' movement during last seven months Rupture of peace-talk and re-starting war at Bhadra-10. Such institutions are provide banking services. in determination of the market price of share. The Market Price per Share (MPS) of commercial banks. The market price of common stock (share) does not seem to be in accordance with the financial indicators – Net Worth per Share (NWPS). there are altogether 108 such companies. 2003) Nepal's entry in World Trade Organization (WTO) at Bhadra-25. 2002/03: 8) Investors purchase the stocks of the companies through the primary market (initial offering) or through the secondary market. 2003). 1. Earning per Share (EPS). especially foreign joint 5 . 2060 (August-27. which are listed in NEPSE. Instead. 2060 (Sep-11. 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. Generally. i. and DPS etc. However. The market value is determined by the supply and demand functions.e. EPS. Here arises the question of efficiency of the Nepalese share market. More specifically. NWPS. Most of the investors are investing their funds haphazardly without considering risk involved in their investments. The investors conclude that there has been a foul play using inside information. 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. 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. There are very few practices of analyzing this aspect in the Nepalese context. The high movement of share prices may be the outcome of the efficient market behavior. 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. the trend is that the MPS of public quoted companies is above their book value.venture Banks' has been much higher than MPS of other sectors. the research questions are: 1. That’s why the major issues might be whether the MPS of listed companies. The reaction is based on the assumption of strong form of the market efficiency. net worth and price multiples. Moreover. What are the major financial indicators which have major influence on determining the MPS? 6 . the overall NEPSE is depended upon MPS of such companies. are really representing the financial indicators. 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. in an efficient market MPS fully reflects all the historical information publicly available. especially for selected companies. financial problem and lack of research experience will be the primary limitation and other limitations are as follows: 1. and current year’s dividend) or is the trend of MPS running in accordance with these financial indicators? Are the common stocks of the sampled companies are equilibriumpriced? How much the signaling and informational factors affect the share price? 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? 3. 3. 6. Basically the study is done for the partial fulfillment of masters of business studies. Time constraints. DPS. To examine and evaluate the relationship of MPS with various financial indicators like. DPS and current year’s dividend.5 Objective of the Study 1.6 Limitation of the Study The study will have some limitations. To provide suggestions on the basis of findings.2. NWPS. 1. Is there any specific relationship of MPS with fundamental financial indicators (EPS. 4. EPS. To identify whether stocks of the sampled companies are overpriced. To examine Nepalese investors’ response on the change of price of stock. To identify of major financial indicators which affects on determining the MPS. 7 . 1. To study the signaling and informational effect on share price. 4. The study will confine only to Nepal Stock Exchange and its members. under-priced or equilibrium priced. 2. NWPS. 5. 5. 1. which have been collected from books. 3. 2059 (29-Jan. 2059 (4-Oct. This research study is mainly based on secondary data. company's web site and other publications. Null Hypothesis: There is no significant change in share price before and after the Ceasefire on Magh 15. five from private joint venture banks and three from selected finance companies and rest two from insurance companies among the companies in the NEPSE. the following hypotheses have been set: 1. 2002) event. financial statement and report of the Security Board of Nepal (SEBON) and Nepal Stock Exchange and selected company's' annual report. Alternative Hypothesis: There is significant change in share price before and after the Ashwin-18. 2003) and starting of peace-talk. 2059 (29-Jan. 2. Alternative Hypothesis: There is significant change in share price before and after the Ceasefire on Magh 15. Foreign information and rules affecting the share market is Studies and reference were also extremely limited in the ignored. Due to the lack of data other sectors can not be used. 2002) event. prospective of Nepalese stock market.2. The study covers the information of only few fiscal years' data.7 Test of Hypothesis On the basis of the earlier stated variables and events which affect the price of securities. Null Hypothesis: There is no significant change in share price before and after the Ashwin-18. 2059 (4-Oct. The study has to be done on the secondary data of selected ten companies of financial indicators. 5. 3. Null Hypothesis: There is no significant change in share price before and after the five major political parties' movement. 4. 2003) and starting of peace-talk. 8 . 2060 (August-27. Chapter II: Second chapter deals with the review of available literature. journals. It includes review of previous unpublished Master degree thesis. articles etc. the important chapter of the study will be the presentation & analysis of data. 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. Chapter IV: Chapter V: This chapter includes the brief outline of stock market in Nepal. population and sampling. 2060 (Sep-11. This includes background. 5. 2060 (Sep11.8 Organization of the Study Chapter 1: First chapter deals The whole study will be divided into following five chapters: with introduction. It includes research design. 1. 2060 (August-27. objectives of the study. sources of data. books.Alternative Hypothesis: There is significant change in share price before and after the five major political parties' movement. 9 . 2003). Null Hypothesis: There is no significant change in share price before and after Nepal's entry on WTO on Bhadra-25. statement of problem. The fifth chapter. method of data analysis and research variables etc. Chapter III: Third chapter explains the research methodology used in the study. 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. limitation of the study and organization of the study. 4. 2003). Alternative Hypothesis: There is significant change in share price before and after the Nepal's entry on WTO on Bhadra-25. 2003). 10 .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. Therefore.1 Conceptual Framework: 2. 2. The primary instruments of the capital market are stock and bonds (equity and debts). a better understanding of these determinants may increase investors' confidence in the stock market and thereby enhance the effectiveness of corporate resource allocation. It is concerned with that private saving. widely it consists of series of channels through which the saving of the community are made available for industrial and commercial enterprises and authorities. So. The number of listed companies and their 11 . in this chapter. individual as well as corporate. The price behaviour of the stock and its trading activity has got the tremendous concentration in security investment. Hence more and more concerns over pricing behaviour are arising and most of the concerned books bear some paragraph on this issue.CHAPTER .2 REVIEW 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. that are turned into investment through new capital issue and also new public loan floated by government and semi government bodies. industry. Therefore it includes both the new issue market and the old market. the capital market is the market for long term borrowing and lending. In capital market demands for funds comes from agriculture.S. The Capital Market was developed by the establishment of Security Exchange Center on 2033 B. So.1. institutional investors and surplus of government. Capital market is concerned with long term finance. 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. trade and government while the supply of funds comes from individual or corporate savings. The history of capital market is not so old for Nepalese context.1 Capital Market: A place where long term lending and borrowing takes place is known as capital market. which will bring the positive result to the economy as a whole.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 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. (Sharma. the development of the security market in Nepal takes its pace only the establishment of these banking and finance companies. Security market. 2002:16) There are two important functions of securities market. is such a market mechanism which mobilized the fund of savers to the users and thus this financialization boosts the industrialization and trading activities. (Levine. While the first aspect is obviously much more important from the point of view of economic growth. In fact. The most effective use of idle and surplus resources can be brought into practice only by means of market mechanism.trading was very negligible until the government of Nepal has made economic reforms along with broad financial policy in the process of economic liberalization. Thus the liquidity of the stock market affects the raising of new capital from the market. As they were established as public companies. 2. 1992: 33) Security market sets a price for the securities it trades and makes it easy for people to trade them. the second aspects is also considerably important. these companies have to issue some of their share of the general public. namely the raising of funds in form of shares and debentures and trading in the securities already issued by companies.1. The security market can be defined as a 12 . Securities market facilitates the sale and resale of transferable securities. a structural network of savers and users of fund. if facilities for transferring of existing securities are abundant. This aspect is called the liquidity of the stock market. So. 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. 1. 1992: 457) 2. The existence of a stock exchange facilitates all these functions without which it is almost impossible to do so. by and large. The continuity of securities market provides the liquidity necessary to attract investor's funds. Without exchanges. The stock exchange provides market in a wide range of traded securities.mechanism for bringing together buyer and sellers of financial assets to facilitate trading. generally of medium to longterm maturities. 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. 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. easily find his counterpart for sale or purchase of shares. investors might have to hold debt securities to maturity and equity securities indefinitely. (Gitman. It is doubtful that many people would be willing to invest under such conditions. Securities market is classified into two. Brokers bring buyer and seller together with themselves actually buying or selling. Broker and dealer come together organized market or in stock exchange. one can. dealers and market makers. 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. 1985: 22) Most of the investors are attracted to the equity shares because of its marketability and liquidity. dealers set price at which they themselves are ready to buy and sell (bid and ask price respectively). (Winfield. Since the stock exchange is a place where a large number of buyers and sellers congregate. A continuous market also reduces the 13 . government and public organizations.3 Stock Exchange: The stock exchange is an institution where quoted securities are exchanged between buyers and sellers. The investor can convert his shares into cash at the prevailing market prices readily. issued by companies. Along with this. evaluation of securities. However. 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. Enable transaction to be made at this price quickly and easily or provision for liquidity. Its value depends on expectation of the amount of those benefits and evaluation of risk involved. a very 14 . 1992: 458) The securities exchanges help to allocate scare fund to the best uses. 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). there is lot of functions of security exchange such as ready market and continuous market. besides these functions. Since the market may quite big. Expectation and evaluation reflect both the information available and the conclusions people draw from that information. Main Function of Stock Exchange: Price Discovery Security is a legal representation of the right to receive future benefits under conditions. they allow investors to access the securities risk and return and to move their fund into the promising investments. However. (Gitman. Price discovery is the process of arriving at fair prices for securities. no single buyer or seller can influence the price of a share to any significant extent. canalization of savings and widening the share ownership etc.volatility of security prices further enhancing liquidity. That is by disclosing the price behavior of securities and requiring the disclosure of certain corporate financial data. there are three things a security exchange must do: • • • Determine a fair price for the securities it trades or price discovery function. An efficient market is one that allocates fund to the most productive uses. safety of transactions. Enable transaction to be made at as low cost as possible or minimization of transaction cost. the shifting of this balance results in incessant adjusting of price in search of the ever-changing new equilibrium. In an ideal market value of securities equal its price of securities and prices reflects all available information about the market. There are many other reasons that causes the stock price fluctuation. 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.4 Price Determination: The share price is determined in the floor by the interaction of market forces i.important fact that should not be forgotten is the concept of ideal market or market efficiency. Dividend is the most important factors on the determination of stock price. non-economic and market factors.e. which also the necessary pre-condition for approaching to the fair price. 1980: 85) The stock exchange produces. (Gupta. 1982: 148) 2. major of them are economic. Then market price moves upward and downward. The price is determined by the point of equilibrium between supply and demand. Dividends are strongly influenced by the earnings power of the 15 . 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. capitalized at 'notional rate of interest' the rate which will prevail if and when all the liquid savings are employed into productive purposes. as close as possible to investment value based on present and future income yielding prospects of various enterprises. through its continuous process of evaluation.1. (Ackerman. prices of securities. demand and supply. In the securities market there is a great importance of demand and supply for price fixation. 2. the most fundamental factor in stock price fluctuation lies in changes in corporate earnings. company’s policy regarding capitalization of earnings as well as government rules & signaling effect Inefficient Market Theory: Conventional approach has considered that market is inefficient. The next influencing factors are non-economic factors. or internal factors of the market.firm. is strongly influenced by interest rates. including changes in political conditions. Similarly the other influencing factors are market factors. contribute to making up the economic factors influencing stock price.5 Theory of Price Behavior The forces of supply and demand interact to determine a stock market price. such as technological advance and the like. Fundamentalists and Technicians. investors were generally divided into two groups. which together with interest rates and business cycle trends. Earning power. Besides these factors the of stock prices are influenced by the corporate the performance of the market. “Prior to the development of the efficient market theory. change in the weather and other natural conditions.1.” (Reilly. They are:i) ii) Inefficient Market Theory Efficient Market Theory the company. that influences the stock prices. which includes technical analysis theory. In this way. in turn. such as administrative changes. may be cited as the third category. considering of the tone of the market and supply-demand relations. There is a very close correlation between corporate earnings & dividends. and changes in cultural conditions. There are essentially two schools of thought to explain the stock price behavior. If demand is high and supply is low then the price of stock goes up and vice-versa. 1986: 347) The two groups are analyzed as follows: Technical Analysis 16 . Technical theory involves study of the past volume and price data of the securities to predict future price fluctuations. can be detected sooner or later in charts of market action. The basic assumptions underlying technical analysis are listed below: Market value is determined solely by the interaction of supply and demand. and these recurring patterns can be used to forecast price movements. technical analysts record historical financial data on charts. Aside from the effected of minor fluctuations in the market. The tools of technical analysis are therefore designed to measure supply and demand. The changes occur in financial and economic variables are to be adjusted in the light of the present situation. some are used to predict the movements of a market index. On the assumption that history tends to repeat itself. Changes in trends are caused by shifts in supply and demand. It involves the study of past market behavior with reference to various financial and economic variables are to forecast the future. Technical analysis theory of share price behavior is based on past market information. Some chart patterns tend to recur. Supply and demand is governed by numerous factors. and some are used to predict both the action of individual securities and the market action. Technical analysts or chartist. both rational and irrational. Shifts in supply and demand. it is believed that knowledge of past patterns of share prices will help to predict future prices under similar circumstances. and that by 17 . Some charting techniques are used to predict the movements of a single security. as they are commonly called. Typically. study these charts in an effort to find meaningful patterns to predict future prices. stock prices tend to move in trends that persist for appreciable lengths of time. believe that they can discern patterns in price or volume movements. no matter why they occur.Technical analysis is based on the widely accepted premise that security prices are determined by the supply of and demand for securities. When the supply of a stock is greater than the demand. reflect the patterns of buying and selling. These. looking for "head and shoulders" formations. 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. Eventually. or market psychology.observing and studying the past behavior patterns of given stocks. Technical analyst believes in the theory behind chart formations and patterns. the trend will be down as there are more sellers than buyers. the trend will be up as buyers "bid up" the price. Dow Theory The Dow Theory is one of the oldest and most famous technical tools and was originated by Charles Dow. and if the forces of supply and demand are nearly equal. Stock prices always move in trends because of an imbalance between supply and demand. they believe. Trend which are very brief are called minor trends. Technical analysis comprises many different subjective approaches. who founded the Dow-Jones 18 . Price moves in trends. A trend indicates there exist an inequality between the forces of supply and demand. the market will move sideways in what is called a "trading range". They read charts much like ancient astrologers read the stars. 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. those lasting a few weeks are known as intermediate trends. they can use this accumulated historical information to predict the future price movements in the security. Certain patterns or formations that appear on the charts have a meaning and can be interpreted in terms of probable future trend development. but all have one thing in common that is. accumulation and distribution. when demand exceeds supply. belief that these past movements are very useful in predicting future movements. By analyzing trend lines we can determine what trend is in force. and trends lasting for a period of months are major trends. It helps us to act safe in market both in bullish and bearish market. their management. “Fundamental analysts believe into companies’ earnings. firms’ competitor's market conditions and many other factors. Delineating primary trends is the primary goal of the DOW theorists. Tertiary Movements: These are simply the daily fluctuations. The analyst who believes on fundamental facts to determine the intrinsic value of stock is popularly known as fundamental analyst or fundamentalist. industry and company statistic. 1986: 524) 2. (Francis. Primary Trends: They are commonly called bear or bull markets. firm’s financial statement. Nonetheless. The second is the short-swing.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. 3. Fundamentalists forecast stock price on the basis of economic.return framework based upon earning power and the economic environment.” (ibid) 19 . Fundamental Analysis Fundamental analysis approach involves working to analyze different factors such as economic influences. the chartists should plot the asset's price or the market average each day in order to trace out the primary and secondary trends. According to Charles Dow. its competitor and pertinent company information like product demand. dividends and management in order to calculate an intrinsic value for firms’ securities. The Dow Theory asserts that daily fluctuations are essentially meaningless random wiggles. Dow Theory practitioners refer to these three components as: 1. industry factor. the third is the main movement covering at least four years in duration. all going at the same time. The first is the narrow movement form day to day. the market is always considered as having three movements. earnings. running from two weeks to a month or more. governmental actions. The principal decision variables ultimately take form of earrings and value with as risk. economic outlook. Secondary Movements: Secondary movements are sometimes called corrections which last only a few months. “ The fundamentalists maintain that any points of time every stock has an intrinsic value. There are various models developed by fundamentalists to reflect the price of the securities. 1978: 886). 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. Price changes as anticipation changes which in turn change.1986: 398). 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. first it is not known in advance what the appropriate discount rate should be for a particular stock. 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. a new piece of news is released. Like the portfolio models of Markowitz and Tobin. In other words. The intrinsic value is the true economic work of financial assets. Therefore the actual price of security is considered to be a function of a set of anticipation. 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. The CAPM substantiated the idea that. and the development of the CAPM. good anticipation of cash flows and capitalization rate corresponding to future time period. in competitive 20 . as a result of new information.The objective of fundamental security analysis is to appraise the intrinsic value of a security. But in practice. Therefore fundamentalists estimate their intrinsic value by studying in detail of all matters that is relevant to company. And the actual price should reflect intrinsic value of the stock i. 1983: 283). implicitly assuming that these standard deviations exist (Fama. 1971: 30).e. was accomplished by Sharpe(1964) and Lintner (1965) (Stephen. risk free rate of interest. there are no transaction costs. 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 Individuals have homogeneous expectations • • utility of their portfolios over a single period planning horizon. • is given. there are no taxes. Similarly investors required rate of return increases as the amount of dividend The quantity of risky securities in the market 21 . investors are not indifferent between current dividends and retention of earnings. the market is competitive.(Stephen. expected returns & standard deviations.equilibrium. securities are completely divisible. variances and co-variances among returns. 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. • • Individuals can borrow and lend freely at a The market is perfect. Gorden’s model: As per the Gorden’s model about relationship of dividend policy and stock price. rather the own or intrinsic risk of the asset. they have identical subjective estimates if the means. 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. J. E. E. Thus the growth rate (g=br) is constant forever. It means high dividend leads to increase in share prices. The stock price will be increased with the increase in the retention ratio of the firm 22 . The corporate tax. It means dividend and stock prices are positively correlated with each other in a declining firm. Therefore dividends and stock price are negatively correlated in such firms. c) Declining Firm (r<k): The share price tends to rise in correspondence with rise in dividend payout ratio. No external financing is available. It means dividend and stock price are free from each other in normal firm. The discount rate is greater than growth rate. K>g. 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. dividend policy of a firm affects its stock price. Walter on the relationship of dividend and stock price. The firm and its stream of earnings are perpetual. b) Normal Firm (r=k): The price of share remains constant regardless of change in dividend.decreases. do not exist. The retention ratio (b) once decided upon is constant. appropriate discount rate (Ke) are constant. • • • • As per this model. Internal rate of return (r). The relationship between firms internal rate of return and cost of capital are the determining factors to retain profits or distribution of dividend. 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. Walter’s model: As per the study of J. b) c) 23 . 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 firm does resort to debt or equity financing.when the internal rate of return is greater than the cost of capital. Thus. Normal Firm (r=k): If the firm’s internal rate of return and cost of capital are equal. Assumptions of Walter’s model: • • • • • Retained earnings constitute the exclusive sources of financing. The relationship between dividend and stock price is negative on such firms. The firm’s internal rate of return and its cost of capital are constant. 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. such firms are known as declining firms. such firms are called normal firms and there is no role of dividend on such firm’s stock price. as per Walter zero dividend policy will maximize the market value of share for growth firms. Declining Firm (r<k): If the firm’s internal rate of return is less than cost of capital. Dividend payout ratio does not affect the value of share whether the firm retains the profit or distributes dividend. 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. The firm has perpetual life. The firm distributes its entire earnings or retains it for immediate reinvestment. Value of earning per share (EPS) and dividend per share (DPS) are remain constant. such that there exist an optimal allocation of resources among firms and an optimal allocation of securities among investors. it is analyzed and interpreted by the 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. therefore. 2002: 27) The word “Efficiency” as applied to securities market has unfortunately been used to represent a variety of logically distinct concepts. In the same way.Thus. An efficient market can exist if the following events occur: 1) A large number of rational. it is the central issue of the efficient market concept. “In an efficient market security prices ‘fully reflect’ available information” (Fama. The result is a possible change in the existing equilibrium price. based on all publicly available information.” (Sharma. profit maximizing investors exist who actively participate in the market by analyzing. Efficient Market Theory: In a competitive market. The new equilibrium price will hold until yet another bit of information is available for analysis and interpretation. In this study. Regardless of the form of information. in normal firm there is no relationship between dividend and stock price. who faces a given set of prices. it is the key to the determination of stock prices. Walter concluded that when the firm is in growth stage then dividend is negatively correlated with price of share. it is concerned only with informational efficiency. 1976: 133). and (b) to aid the individual investor. “The role of information is two-fold: (a) to aid in establishing a set of security prices. Similarly. As soon as a new piece of relevant information becomes available. in the selection of an optimal portfolio of securities. In particular it means: a) exchange efficiency (b) production efficiency and (c) information efficiency. there is positive relationship between dividend and price of stock in declining stage of firm. This price represents a consensus of the members trading in the market about the true worth of the good or service. valuing and trading 24 . 1974: 2). 1986: 166) “The degree of market efficiency has important implications for the economy and for the investment 25 .” (Rubinstien. 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. interprets it similarly. “In an idle efficient market. In such a world. 1943: 425) In such a market. These investors are price takers. (Charles. one participant alone can not affect the price of a security. every one knows all possible-to-know information simultaneously. 2) Information is free of cost and widely available to market participants at approximately the same time. ceteris paribus) portfolio position. Similarly. the only price change that would occur is due to the result from new information.” (Bhalla. 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. 4) Investors react quickly and accurately to the new information. causing stock prices to adjust accordingly. 3) Information is generated in a random fashion such that announcements are basically independent of one another.stocks. use available information to attempt to secure more desirable (higher returns. market participants. acting in their own selfinterest. “in a perfect and competitive economy compared of rational individual with homogeneous beliefs about future prices.” (Reilly. and behaves rationally. Price change will be random walk in response to the information. that is. “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. the current prices of a security obviously “Fully Reflect” all available information. by any meaningful definition present security prices must fully reflect all available information about future prices. 1975: 812) In an efficient market. all prices are correctly stated and there are no “bargains” in the stock market.” (Cheney. “Efficient market theorists believe that some do better then average because of luck. No one can consistently do better than the average.decision-makers.” (Weston and Copland. 1975: 815) One set of test of market efficiency examines the informational efficiency of security prices. 1996: 93-94). 1974: 3) The conclusion is that – “In an efficient market there are neither free lunches nor expensive dinners. “Efficiency in this context means the ability of the capital markets to function so that prices of securities react rapidly to new information. A corollary is that investors will also be less likely to discover great bargains and thereby earn extraordinary high rates of return. 1997: 746) In such a market.” (Rubinstien. Mis-priced security result in incorrect allocation of capital.” (Bhalla. and investors will be less likely to make unwise investments. It is not possible to systematically gain or lose abnormal profits from trading on the basis of available information. Existing model of efficient markets imply that all relevant information regarding given stock is reflected in its current market price. Such efficiency will produce prices that are appropriate in terms of current knowledge. This implies that no investor can earn excess returns by developing trading rules 26 . 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. 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. In an economic sense. it is important that security prices provide accurate signals that can be used to allocate capital resources correctly. This notion of market efficiency can be divided into three categories based on type of information used in making market decisions. 1943: 429) In such kind of market. 1996: 94) b) Semi-strong Form Market Efficiency: It says that security prices fully reflect all publicly available information. new products development.” (Jones.1 : Market Efficiency in Three Information Level Strong Form All Information Semi-Strong Form Public Information c) Weak-Form Market Data 27 . then only a few than what could be earned by using a naïve buy-and-hold strategy. dividends. is immediately reflected in prices. “If the semi-strong hypothesis is true. “An extreme version of the strong form holds that all non public information. stock split announcements. no investors could earn excess return using publicly available resources such as corporate annual reports. A market that quickly incorporates all such information into prices is said to be semi-strong efficient. public and non public. which asserts that prices fully reflect all information. 1986: 608) Strong Form Market Efficiency: “The most stringent form of market efficiency is the strong form. excess rates of return by using publicly available information in a superior manner. including information that may be restricted to certain groups such as corporate insiders and specialists on the exchanges. no group or investors should be able to earn. this version refers to monopolistic access to information by certain market participants.” (ibid) Chart: 2. It contains all publicly available data such as earnings.based on historical price or return information” (Weston and Copland. Thus. NEPSE price information or published investment advisory reports. In effect. financing difficulties and accounting changes. over a reasonable period of time.” (Francis. They gave a controversy to the random 28 .These three hypotheses are not mutually exclusive. large numbers of studies have been done throughout the world. After the discovery of this model. 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. 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. It is necessary for the weak form hypothesis to be true in order to the semistrong and strong form hypothesis to be true. In 1937.2 Review of Stock Market in International Context: Numbers of research studies have been performed internationally on the stock market. He also concluded that the current price of a commodity was an unbiased estimate of its future price. In 1927. 2. Alfered Cowels and Herbert E. Jones reported that stock prices moved with predictable trends. Some of them are as follows: In 1900. Louis Bachelier first tested the random walk model. Slutsky proved that the randomly generated price changes look like stock price changed and that they appear to exhibit cycles and other patterns. Alfered Cowels found little evidence that stock market analysis could predict future prices. Strong-form efficiency encompasses the weak and semistrong forms and represents the highest level of market efficiency. In 1933. they differ only in the degree of market efficiency. He observed the daily proportionate prices of each 30 individual stocks of the Dow Jones Industrial Average. He employed the statistical tools such as serial correlation and runs tests to draw inference about dependence of the price series. He analyzed the data by serial correlation coefficient and concluded that the subsequent stock price movement forms random walk. 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. His work was significant in that he gave a number of methodological suggestions for testing what he calls the chance model. He showed that the successive price changes are statistically independent to its past 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. The time periods covered started from end of 1957 to 26th. 1995 to Dec-28. H. 1956 and found similarity between these two series. He further observed that the first difference of these two series produce the same pattern. In 1959. Fama's study (1965) on the random walk model was one of the best definitive and comprehensive ever study conducted. In particular. In 1953. This finding remained a challenge against the random walk hypothesis for more than two decades. He tested the model on the weekly price changes of the 19 indices of British industrial shares and in the spot price series of cotton (New York) and wheat (Chicago). September 1962. The value was extremely low and indicated that the weekly change data had almost no power in predicting future prices changes. He calculated auto correlation coefficient for daily change in 29 . he suggested runs analysis for testing independence of price changes.V.walk model as valid share price behavior model in USA. Kendall made significant contribution to advance in the study of the random walk model.06. 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. 1991: 1584) C. He also calculated serial correlation for lag from 1 to10 for non-overlapping differencing intervals of four. This ordering corresponds to intuition about the risks of the securities. the variation in expected returns tracked by the term spread is similar for all long term securities (bonds and stocks).30. (Fama. It is a mechanism for the 30 . All the results are again not significantly different from 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. 11 out of 30 stocks had correlation coefficient more than twice their computed standard errors. However. which is near to zero. and from large stocks to small stocks. which suggests that it reflects variation in a common premium for maturity risks.30.log price series.123.B. Gupta had commented that the capital market serves as a link between suppliers and users of finance. from bonds to stocks. probably unimportant for both the statistician and the investor". 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. 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. On the other hand. The coefficients ranged from smallest 0.06 to the largest 0. nine and sixteen days to examine the possibility if price change across longer interval show dependence. Fama concluded. But on the daily price changes. which is near to zero. 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. "Dependence as such as a small order of magnitude is from a practical point of view. 1953-1975 has revealed that the stock market and economic activity move in similar cyclical patterns.A. but later as a passage of time even the developing countries like India. Simha in his book "The Capital Market in India" has observed that capital is an extremely fascinating subject. The study conducted by Bary Borsworth on ' Industrial Production and Price of Common Stock'. 1962: 82).L. This fundamental relationship shows that the stock price is meaningful in the sense of reflecting real economic variables. Many profitable investments require a long-term commitment of capital. but investors are often reluctant to relinquish control of their savings from long periods. In connection with the necessity of capital market. 1960: 1). Now they adopted it too. S. 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 31 . Philippines. Nepal etc begins to feel its necessity. Bangladesh. By return to capital is meant the algebraic sum of increment in the value of yield (Dookha. has mentioned in his article that stock market may affect the economic activity through the creation of liquidity..mobilization of public savings and channeling them in productive investments (Gupta. Thus capital market works as a powerful medium between potential investors and users of finance. In fact even as regards the resources for the public sector. 1978: 325). The investment decision in the stock market is a function of the prevailing market price and return to capital. Formally the necessity of the capital market was felt not only by the developed countries like U. the capital market has a rather important role to play (Simha. Ross Levine in the finance and private sector department division of World Bank's Policy Research Department. Germany etc.. An efficient capital market is an indispensable pre-requisite to economic development. A senior economist. U.N.K.S. of asset prices. “The premise developed in this talk is that liquidity and price discovery are important dimensions of asset markets and. Further by making investment less risky on more profitable stock market liquidity can also lead to more investment (Levin.portfolios.” “Note that my arguments do not imply that markets are necessarily inefficient. Further the writer says that. old information is obsolete. more profitable investments. on the article on Financial Journal writes that information plays important role in the discovery of assets (securities). finance researchers have long focused on the information efficiency of asset prices. 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. but if traders have diverse information sets. by extension. 1995: 35) Hara. there are no arbitrage opportunities here. uniformed investors demand compensation for portfolioinduced risks which they cannot diversify. then these expectations need not be the same across traders. The innovation here is the argument that when information is asymmetric. i. the adjustment of prices of full information values can differ widely 32 . 1996: 133). Traders with superior information will move prices toward full information levels. liquid markets improve the allocation of capital and enhance the prospect for the long -term economic growth. 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. Thus.e. to give way to hope. Market prices can be martingales with respect to information. but continuously attaining full information levels is not credible– new information arrives.”(Chandra. nor is there the provisional free lunch. By facilitating long-term. However. companies enjoy the permanent access to capital raised through issues. That information should affect asset prices is hardly new. fear and greed. as in microstructure models. At the same time. “Common stock has one important investment characteristic and one important speculative characteristic. 3 Review of Journals. the stock market behaviour in smaller and underdeveloped capital markets is thus one of the important areas of the study in 33 . journals and research studies concerning stock market and its pricing behaviour. previous research works. As per the book.S. A book about capital market by Dr.across markets that are deemed efficient. R.” (Hara. which are related to stock market are consulted and reviewed. 1994: 42-43). Pradhan's is very valuable for the purpose of analyzing the capital market in Nepal. Books and Articles of Stock Market in Nepalese Context: As stock market is in infancy stage in Nepalese context.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.S. the available articles. books. 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. the limitations of Nepalese society regarding the investment in stock market is still reality of Nepalese Capital market. So Dr. And it is this difference in adjustment that gives rise to the effects discussed here. R. 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. there are limited books. Similarly the next book by Dr. Although the book is written in the early stage of the development of stock market. Mahat made the first priority to establish stock exchange for the development of stock market. 2003: 1351) 2.”(Pradhan. 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. So. Basu (1983) also finds earnings-price ratio is explaining the cross-section of average returns on US stocks. 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. and Black(1972). early stage of growth. Linter (1965).finance. "In Nepal. this chapter is expected to provide at least some insights into stock market behaviour in Nepal. the listing of shares in Stock Exchange Center (SEC) and their trading in the stock market is a recent phenomenon. Chan Hamao. Reid. This chapter can be considered important. 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 34 . The Nepalese stock market is characterized by low trading volume. 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. He finds that average returns on large stocks are lower while average returns on small stocks are higher. the most prominent is the size effect of Banz(1981)." (ibid) Among the various empirical contradictions to the Asset Pricing Model of Sharpe(1964). absence of professional brokers. and limited information available to investors. limited movement of share prices. Similarly. Viewed in this way. 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. and Lakonishok (1991) find the strong role of book-to market equity in explaining the cross-section of average returns on Japanese stocks. and this chapter prepared with reference to Nepal is a small attempt towards that end. and Lanstein (1985). Again. as Nepal has already started the process of privatization of public or government owned enterprises. Thus it is felt necessary to study stock market behaviour in the context of smaller and under-developed capital markets. the development of stock market primarily depends on program and 35 .1996: 6) Panta. May 18. their applicability is yet to be seen in the context of smaller under-developed capital markets. 1999: 25) “Investors were enlightened and they stated inquiring about company’s financial health and future prospect before buying or selling shares. 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. assets turnover and interest coverage. "Shareholder's Democracy and AGM feedback" Prof. As a result. Many who could not cope e\with the system of intelligent speculation left the ground. According to her study.context of developed and big 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. price earning and dividends with liquidity. Rekha analyzed in her study. 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. profitability. leverage.”(The Kathmandu Post. In an attempt to assess the stock market behaviour in Nepal. In the book. At present. Success of companies directly depends on the protection of their owners. (Shrestha. "Current status of share market in Nepal". market value to book value. it specifically examines the relationship of market equity. the numbers of buyers gradually came down and so did the prices. Manohar Kumar Shrestha has focused various issues related to protection of shareholder's expectation. the trend of Nepalese stock market and present state of primary and secondary market was found satisfactory. People turned to price-earning multiples: NEPSE indexes informed trading became sort of a norm when stock market entered 1995. For example. First of all they should know the financial health of that company. to a great extent. 1999: 10). it is difficult to develop more efficient secondary market. Therefore. dealers by increasing investor interest in it. trading system for both equity and debt securities. In Nepal. Capital Market is a crucial element in the national economy. Security market experiences both boom and boast soon after the beginning of securities trading through brokers' member in the stock exchange floor. The strategic plan released by securities board can. Its role in reinvigorating and boosting the economic activity in the country holds significant. it could not sustained (Business age. Unless investors begin analyzing the intricate financial 36 . 2001: 20) “Investment in share has traditionally been done by rating the institutions on the price of price earning ratio or dividend. energize the investors.their implementation. Market price is equal to earning per share divided by discount factor.” (Business age.” Investors have to learn few things before they make investment on stock. 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. current year anticipated profit and calculate earning per share and price earning per share and price earnings ratio. he/she must see its balance sheet or at least paid-up capital. if somebody want to invest in the share of Standard Charted Bank. Through the market started to function quickly boosting the price of share to an unexpected level. last year net profit. “Return from investment in stock is not short run phenomenon. Hardly do investors compare current assets with current liabilities or take a look at the debt equity ratio. 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. the overall policy environment has not been conducted to the development of stock market. other stocks market participants hardly making profit. refuting investors’ allegations of the market manipulation and insiders’ trading of last February. despite a pretty good performance by commercial banks.”(The Rising Nepal. incorporate finance theory as a wasteful use of scares capital. lack of diversity in the range of financial instruments and the scope of active participation for the various intermediaries limited by vertical barriers. Among them some thesis are reviewed here for analysis of literature. resource mobilization has a vital role in the developing economy like Nepal.details of corporate institutions before making investment decision. On the study of Mr. This includes low level of investors' confidence. demand for shares of commercial banks outpaced supply and their price boomed. With the commercial bank becoming the only potential destination. Even officials at the stock exchange and the securities board. 2001: 7). The development of the Stock market is a must for the resource mobilization. rather than through market study and credit rating. And that. and even they did failing to meet investors expectations. Most earning of investor here have been in the form of dividends rather than capital gains. disclosure of poor and manipulated financial information weak enforcement of regulation absence of instructional investors. Bharat Prasad Bhatta. make it more apparent that investment in the past was done on whim. 37 . he focused that.4 Review of Unpublished Masters' Degree Thesis: There are many masters' thesis prepared by various researcher in the subsequent previous years.”(Business age 2001:25) “ADB experts have seen many obstacles to the growth of the capital market. Share investment has traditionally been guided by the investors return. 2. discreetly claimed that the Nepalese stock market is in a nascent stage. investment are made more on an impulse. the market cannot develop smoothly. though high dividends are often seen. Now the latest slums in the secondary market. which have checked the resource mobilization in the economy. • The government should make appropriate policies and for the enhancement of the entrepreneurship programs development in the Nepalese economy. Investment in corporate sector should be encouraged and The regulatory authorities of the stock market should cerate their share should be listed in the stock exchange. In his research work. To diagnose and compare the sectoral financial status of the To analyze the market share prices of the Nepalese stock To find out the impact of the secondary or primary market stock in Nepalese stock market market. 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. Bhatta recommended the following points by his recommendation and conclusion section: • The government should make not only policies for the capital development but also implement these policies market • appropriately.Bhatta set the following objectives and followed by the some recommendation too which is given below: • • • • To analyze the trend of the Nepalese stock market. 38 . • an environment to rise the trading of share in the stock exchange. and vice versa. "Dynamic of Stock Market in Nepal" Mr. According to the above objectives "Mr. the stock market has a good prospect for the resource mobilization to finance the productive enterprises in the Nepalese economy.There are various problems of Nepalese Stock market. Khagendra Prasad Ojha. insurance and manufacturing is not encouraging. entitled "Financial Performance and Common stock pricing" at 2000 were: • • • To study and examine the difference of financial performance and stock price. Some corporate firms with long history have relatively stable profitable parameters then that of the newly established firms. All other industries have not the perfect correlation between the dividend paid and stock prizes. To examine the relationship of dividend and stock price. The findings presented on behalf of the given objectives were: • • Nepalese stock market is in infancy stage. To explore the signaling effect on stock price. • • Older firms have been issuing bonus share more times than Dividend per share is relatively more stable than dividend the new one pay out ratio. That’s why pay out ratio and dividend yield has been highly fluctuating. to other industries including finance -companies. The study done by Mr. • There is significant positive correlation between the dividend paid and stock prices of banking and manufacturing industries. Ojha denotes that Nepalese stock market is still in developing stage. Similarly dividend pay out ratio and dividend yield is more fluctuating 39 . • 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.Likewise the main objectives of the dissertation prepared by Mr. In general it is Dominance of banking sector is prevalent in the market due very new and just started to develop. 0. “Mr.04 of 1.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.3.” the 40 . Results of the findings. He analyzed runs by total numbers of expected runs. The objectives of the study were. • 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. And the results of runs test were also consistence with the results of serial correlation tests. runs by signs and runs by length.4 & 5 lag days respectively.2.109.102.045 and 0. Runs Test: In order to test the random walk model he also applied run tests. 0. • To discuss theoretically the movements of stock market prices as predicted by the random walk model. • To develop the empirical probability distribution of successive price changes of an individual common stock and a stock market as a whole. Mukti Pd. he concluded. 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. Aryal (1995) has conducted research on ‘The General Behavior of stock Market Prices’. 0.088. The major findings and conclusion of the study are as follows: He found average correlation of 0. For this purpose he computed the serial correlation of 1-5 lag days applying the natural logarithm model for daily price changes. 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. 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. Stock market was not properly analyzed for smooth operation of secondary market. Bachhu Ram Dahal describes the stock market as the back bone of the country. 1995: 103) On the research paper on. and maintenance of listed company in Nepal Stock Exchange Ltd.e. volume of stock traded. today’s price changes of an individual common stock is not as unbiased and independent outcomes of yesterday price changes of Bernoulli process..stock price changes can be explained as serially positive dependent to each other as an adequate description of reality i. Signaling factors should be analyzed. price with the help of NEPSE index. examine and analyze the stock market behavior. In his conclusion Mr. decision on stock investment.”(Aryal. stock market. 41 . rate of listing. Specifically the objectives were: • • • • • To study and analyze stock price trend and volume of stock To study and analyze the rate of listing of new companies To study and analyze the investors views regarding the To study and examine the signaling factors' impact on stock To suggest the abstract to the interested parties related to traded on the secondary market. Further he set the main objective of his study was to study. 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. Dahal says that Stock Market is the backbone of investment sector of the country." Stock Market Behaviour of Listed Joint Venture Company in Nepal” conducted by Mr. Nepal stock exchange limited is analyzing stock market behavior in very little area regarding the stock market. It is evident that stock exchange will continue to fulfill their vital functions in the national economy. the trend of the price movement. public interest towards stock market. stock market is the properly market for the development of the national economy. 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. brokers. The problem like lack of strong professional analysis. Though the viewpoint of share transition. Investment is the lifeblood of economic development. The data analysis showed that Nepal stock exchange is not providing facilities for investors such as general awareness about investment. well trained manpower and management delay in transfer of shares. investment procedure for general public and movement of stock trend in different periods and their cause are not explained. 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 substantial competition in innumerable buyer and seller determines the prices with a measure of precision that cannot be obtained in other unorganized market. and NEPSES staffs are making coalition for fraudulent activities towards investors. The development of stock market in Nepal is both challenging and difficult. independent buyer and seller. Moreover there are many other attraction that stock market able to attract the new generation toward it. So. Stock market will be the strong market for the 42 . Most of the investors are complaining that the market makers. information system etc indicates the low performance of stock market. rational investor exist from the Nepalese stock market. So long as private enterprises exist. we know that the stock exchange is the place where stock and shares are bought and sold. So NEPSE should clear this type of charge for the development of stock market. the study used simultaneous equation model as developed by Friend and Puckett (1964). lagged earnings ratio is negative.unemployed young generation to build their career in capital market. To explain the price behavior. the stock market further requires timely research to explore details of the problem and prospects of stock market in Nepal. The main findings of that study were as follows: • • • • • The difference between dividend per share Dividend per share affects the share prices Changing the dividend policy or dividend per The difference between stock prices and The difference between stock prices and To identify whether it is possible to increase the market value of the stock changing dividend policy or payout To test the difference between dividend per To determine the impact of dividend policy share and stock prices and stock prices is positive in the sample companies. Thus. • ratio. 43 . major problems facing by Nepalese stock market and expectation of future growth.e. retained earnings per share is not prominent. The main objectives of that study were as follows: • • on stock price. Mr. variedly in different sectors. i. From Dahal’s study it seems that no comprehensive research has been conducted in relation to the development of stock market in Nepal. it has lots of prospects of development. share might help to increase the market price of share. 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. He used the data considering the daily closing price of 30 listed companies’ shares (ordinary) in the NEPSE. feedback institutional development of efficient market. Surya Chandra Shrestha (1999) has conducted research on ‘Stock Price Behavior in Nepal’. The objectives of the study were: • • To examine the serial correlation of successive daily price changes of the individuals stocks. No study has been conducted on dividends by using primary data as yet. The number of companies included in the same was only 16. 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.• Though there were above-mentioned studies in the context of Nepal. To determine whether the sequence of price changes is consistent with changes of the series of random numbers expected under the independent Bernoulli process. which is quite low. Mr. Moreover. the 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. This is the first attempt that studies dividends based on questionnaire survey. Studies on dividends conducted in the context of Nepal are based on Secondary data only. Tililsina’s study was based on 45 observations. • market • through To determine the efficiency of the stock the To theoretical provide model of efficient policy market towards hypothesis in the Nepalese stock market. 44 . His study period was consists of almost hour and half years. this study aims to examine the efficiency of the stock market in Nepal. He used the as serial correlation test and run test as Test Methodology. it has overcome necessary to find out whether their findings are still valid. 45 . 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. For this purpose he computed the serial correlation of 1-15 lag days applying the natural logarithm model for daily price changes. 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. In order to test independence of stock prices. He analyzed runs by total numbers of expected runs and runs signs.” the successive price changes are not independent random variable for the 30 sample stocks listed in the NEPSE. Run Test: He also. By the study of Mr. Shrestha. 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.2 and 3 lag days respectively. applied runs test. large number of serial correlation coefficients of the log price changes of the 30 stocks for the sample periods are significantly departed from zero. Therefore.07. large number of serial correlation coefficients of the log price changes of the 30 stocks for the sample periods is significantly departed from zero.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. In the study Mr. 0.0825. By the results of his applied models and methodologies he concluded. In overall. 0. And for lags 5 to 15 days were less than 0.2055. The major findings and conclusions drawn on this study were: After applying the required models and methodologies he found average correlation coefficient of 0. the random walk theory is not suitable description for the stock market price behavior in Nepal.0704 for 1. NEPSE trend etc for the analysis purpose. Further more it also shows that there are very few research works conducted about the market price behaviour on the stock market. 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. Most of the above stated studies use technical methods and statistical methods like run test. DPS and NWPS which are the most influencing factors for the MPS. 46 . correlation coefficient. 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 of the important events happened in the country on market price of the stock. it seems that Nepalese stock market is still in developing stage and it is facing various challenges.From the above all studies conducted by various researchers. Thus. Research Methodology. what we are doing at present. Research methodology is a way to systematically solve the research problem. Primary sources of data as questionnaire. We study the social problem again and again to find out the something more about the phenomenon. Simple statistical tools have been used to finish this research works. sources of data and uses of statistical and financial tools are basically explained in this chapter. while collecting and interpreting relevant data. So. different measure have been used. which represent the explanatory and descriptive analysis of the relevant information and data. research design. Methodology refers the various steps that are generally adopted by a researcher in studying his research problem along with the logic behind it. we deal mainly with the method. facts and figures with a view to systematic data collection and data's interpretation. this chapter explains not only talk of the research methods but also consider the logic behind the methods. interview with officials are used to find out the public awareness regarding the investment in the shares. Research is a systematic and organized effort to investigate a specific problem that needs solution. which are used in the context of our research study.3 47 . their risks and return and pricing of shares of the selected companies listed in the stock exchange. In this chapter. To draw inferences on the market performance of stock market and price formation. It prone to error. In this regard. Both descriptive and analytical types of research are employed to fulfill the objective of research work. The first look may not be adequate. This process is called research. we enter in to the subject matter again and again and study the problems differently and thoroughly each time. CHAPTER .RESEARCH METHODOLOGY Research means to search again and again. which are used in the period of research. 2 Universe and Sample: The analysis of stock market of the selected banking. findings. 3.The present study is basically related with the Nepalese stock market and the share price behavior of the selected listed companies. Similarly to access the opinion. descriptive research design has been used. 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. 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. conclusion and recommendations. tabulation and compilation of data. and controlling the study. The research design is thus an integrated frame that guides the researcher in planning and executing the research works. Due to the low volume and amount of 48 . "Research Design is a plan. implementing. computation of compiled data and financial parameters. structure and strategy of investigation conceived so as to obtain answer to research question and to control variances". NWPS various statistical tools has been used under the phenomena of quantitative research design. financial and insurance companies listed in the Nepal Stock Exchange and information regarding these companies are taken as the total population.1 Research Design: Research design is the organized way of research methods or techniques used through the entire study. In the same way. (Kothari. Therefore. To analyze the past phenomena historical research design has been used. It is an integrated system that guides the researcher in formulating. all the banking. behavior or characteristics of a given population and to describe the situation and events occurring at present. DPS.3. to analyze the significant relation between MPS on EPS. 1991: 24). The study will explore the collection of data. which covers 9% of total listed finance companies sector and remaining 2.share transaction and insufficient data.1 : Sampling Procedure S No Sector No of Compa ny Listed No of Sample compani es Percenta ge Sample Companies 1 Commerci al Bank 11 5 45% 2 3 Finance Companie s Insurance Companie s 35 13 3 2 9% 16% Nepal Arab Bank Ltd Standard Chartered Bank Himalayan Bank Nepal Bangladesh Bank Everest Bank Annapurna Finance Peoples Finance Universal Finance Himalayan Insurance Everest Insurance 3. sector. 3 from finance 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. The samples will be taken using stratified as follows: Table: 3. 5 commercial banks (45%) has been taken as sample companies which covers the 50% weighted on total sample companies. 50% weighted has been given to this banking sector while taking the sampling companies. service sector and others sectors have been neglected while taking the sampling companies from the listed companies in Nepal Stock Exchange. Out of them 5 from commercial banks.e. 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. 49 . other sectors like Mfg.3 Sampling Procedure For the research work only 10 companies has been taken as sampling companies out of total population. which covers 16% of total listed insurance companies. which covers 45% of total listed commercial banks sector. Out of 11 listed commercial bank. www. www. information are collected by annual report published by Securities Board Nepal (SEBO/N). half-yearly and yearly bulletins published by Nepal Rastra Bank. 3. Economic Survey. Research work that directly related to financial performance and stock market would form secondary data for the purpose of this study. articles and other publications published by different financial intuitions and other useful resources are also taken into consideration. For collecting primary data a set of questionnaire was prepared and distributed to the investors. Trading Index published by NEPSE.nrb. periodicals. 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. Kathmandu and economic survey published by Ministry of Finance. The questionnaire was consisted of objective 50 . Significant information will also be collected from Internet and various websites like www. Guidelines and unpublished thesis.com . The main source of data is annual report of the SEBO/N. quarterly.nepalstock. Thapatali. journals. newspaper cuttings.np etc. Similarly.sebonp. Secondary Data: The secondary source of data will be the annual report of the Security Board Nepal.com . the annual reports of selected banking. 2002 published by Ministry of Finance and different monthly. company's magazines etc.3. finance and insurance companies were the major source to get various data about the related company. different books from library.5 Data Collection Procedure: As the study was based on primary as well as secondary data. Besides annual report various bulletin available.org.4 Sources of Data The main source for the data collection was the central office of Nepal Stock Exchange (NEPSE). The research is mainly based on secondary data. Securities Boards office. Data collected from secondary sources were analyzed through various financial and statistical tools. 3. 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). They were classified and tabulated in the required format and presented in bar and pie diagrams. public view toward the investment in the stock. In this model the market value of shares of a company is dependent of the earnings of the company. These questions are related to the Stock market. 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. it will use retained earnings and the amount of senior firm has retained earnings left over after 51 . 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. discussions were also conducted with investors.6 Data Processing Procedure: Data collected from questionnaires were in raw form. To get reliable information. "As long as there are investment projects with returns exceeding those that are required. Major findings were based on the analysis and interpretation of data. P0 = EPS Ke Where. their prices and their reaction in the information available in the market about the stocks of related companies.questions like multiple choice questions and yes / no questions. Hence. NEPSE staff and other related parties with stock market. 5037 2. 2001.financing all acceptable investment opportunities. Therefore. 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. People make investment in stock because they will get dividend in return. The rate of return on common stock can be expressed in percentage as follows: Rate of return= ( P − Pt −1 ) + Dt Pr ice Change + Cash Dividend = t Purchase price at the start of the period Pt −1 52 . the price they are willing to pay will depend on their expectations of dividends. these earnings then would be distributed to stockholders in the form of cash dividends. Hence. P0= present market value of an equity.1222 4. 1990.2 : Risk Free Rate Fiscal Year Average Risk free Rate 1997/98 1998/99 1999/00 2000/01 2001/02 3. 20) P0 = ∑ t =1 α Dt (1 + ke ) t Where. 328). future streams of cash dividends are to be evaluated and discounted by the cost of equity(Ke). according to this model. If not there would be no dividends. the value of an equity share is the present value of all future streams of cash dividends an investor expects to receive. 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: 3.5812 4. Under this model. (Timilsina.9535 4. Ke= The required rate of return for equity Dt= Expected future dividend at each future date t." (Van Horne.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. f) Market Return (E(Rm)): Market return is the average return of the stocks of all companies in a industry. The standard 53 . ∑Χ n b) Standard Deviation : X = It is a quantitative measure of the total risk of assets. Rf=risk free rate of return E(Rm)=market return or average return βj=beta coefficient of stock j. It measures the dispersion of returns around the mean. 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. It provides more information about the risk of the asset. 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. 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. Total risk contains two parts diversifiable or unsystematic risk and undiversifiable or systematic risk. Thus. rather they are compensated in the market for facing the systematic risk. Under the assumption of CAPM. E(Rm)= This Year ' s Market Index − Last Year ' s Market Index Last Year ' s Market Index ii) Statistical Tools: a) Mean : Mean of a set of observations is the sum of all the observations divided by the number of observations. It is a measure of the total risk of the asset. investors are not compensated for total risk. For this research purpose. R=Rf+(E(Rm)-Rf) βj R=required rate of return on stock j. Its advantage is that the uncertainty of returns can be summarized into a single easily calculated number. where.Where. D. E( r j ) 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.D. n = number of observation in series X and Y. ∑X = Sum of observations in series X.y)’ or rxy or simply ‘r’ can be denoted as r= nΣXY − ΣXΣY {nΣX 2 − (ΣX ) 2 } × {nΣY 2 − (ΣY ) 2 } Where.deviation of a distribution is the square root of the variance of returns around the mean. = S . 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. ∑Y = Sum of observations in series Y. which is computed as follows: C . = ∑ r j − E ( r j )] 2 [ n −1 rj Where. is return on asset A. the closer the relationship between the variables and the closer ‘r’ is to 0 the less close relationship. 1999:234) e) Multiple Regression Analysis: 54 . (Shrestha and Manandhar. known as Personian correlation coefficient between two variables (series) X and Y.V . ∑X2 = Sum of squared observations in series X. “The closer the value of ‘r’ is 1 or -1. The value of the correlation coefficient ‘r’ lies between -1 to 1 that is -1 ≤ r ≤ 1. If r=1. ×100 Χ 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. usually denoted by ‘r(x. ∑XY = Sum of the product of observations in series X and Y. S . ∑Y2 = Sum of squared observations in series Y. For the test of hypothesis 10 NEPSE index before. 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). is called independent variable. there are two types of variables.EPS+b2. 55 . MPS=Market Price per Share (Dependent Variable) a= Regression constant b1. 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. b3= Coefficients of independent variables EPS. valuation of stock. 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.NWPS Where. (Gupta. It is a mathematical measure of the average relationship between two or more variables in terms of the original units of the data. b2.DPS + b3.Regression analysis means the estimation or prediction of the unknown value of one variable from the known value or variable. 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 d t= d n s = Difference between two data Application of Computer Software: To fulfill the study the data has procured and finalized by using correlation coefficient. In regression analysis. The result getting form this software has been presented in annex and the relevant information are extracted and filled up where ever needed. DPS. after and during the major events has been considered. 1999:298) The multiple regression equation is MPS=a+b1. It was established with the objective of facilitating and promoting the growth of capital market. and conversion of the SEC into the Nepal Stock Exchange under the government policy. the SEC limited function for trading the government bonds and national saving certificates only. capital market reform had greatly contributed to the development of primary as well as secondary market for the corporate securities. 2002 :67). 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. Initially. the expansion of the capital market to the desired level had been made in eighth five year plan to reform the capital market. 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. Nepal (SEBO/N) under the portion of the Securities Exchange Act 1983. the participation on the ownership structure of the corporate sector was restricted mostly to the Rana family. underwriting.STOCK 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. the SEC served to promote the primary as well as secondary market for government and corporate securities from fiscal year 1984/85. market making for government bonds and other financial services. Before conversion in to Nepal Stock Exchange (NEPSE) it was the only capital markets institutions undertaking the job of brokering. managing public issue. under a program initiated to reform capital markets converted securities exchange center in to Nepal Stock Exchange in 1993 (Kharel. The rise in stock price and the market liquidity for corporate securities were observed immediately after the incorporation of (SEBO/N) and NEPSE for CHAPTER – 4 56 . The incorporation of the Securities Board. consequently. Thus. His majesty's government. At that time. Thus.one year only. After a year.1 Nepal Stock Exchange (NEPSE) Securities Exchange Center was established with an objective of facilitating and promoting the growth of capital markets. Thus. the growth of stock market is high relative to the growth of the economy. 4. managing public issue. the stock market in Nepal is burning issue and is in its infancy stage also. Although. In Nepal. the stock market is a pivotal institution in the financial system of a country. again downward trend in the stock market started and has been continuing till now. 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. Before conversion in to Nepal Stock Exchange (NEPSE) it was the only capital markets institution undertaking the job of the brokering. The development of the stock market depends largely on financial intimidation as well as on the availability of a wide array of financial institution. again downward trend in the primary as well as secondary market is observed and this phenomenon has been continuing till end of 2001. But after a year. Among all the economical and financial market. Therefore stock market development is partly a natural progression of the development of a country's financial sector as long term economic growth proceeds. 57 . two securities dealer. the share of corporate sector in the national economy is still very low due to the negligible size of corporate sector. It was happen due to the internal and external problem face by the country's capital market. twenty-seven brokers and tenissue manager to provide service of securities. market making for government bonds and other financial services. underwriting. This has positive and immediate impact on the primary market. NEPSE is the only official stock market where there are three market makers. His Majesty's Government under a program initiated to reform capital markets converted Securities Exchange Center in to Nepal Stock Exchange in 1993. converted Securities Exchange Center into Nepal Stock Exchange Limited (NEPSE). the interim government in its short period has initiated banking reformation and has established Citizen Investment Fund (CIF). This has included a focus on the modernization of the trading clearing settlement and surveillance procedures. market makers etc.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. 2 securities dealers and 1 market maker to smooth the daily transaction of buying and selling of securities. The ownership of different members is given below: Table: 4.69 Source: SEBON Annual Report 2001/02 The authorized capital of NEPSE is Rs. operating under security exchange act 1983. 1 2 3 4 HMG/N NRB NIDC Other Members (%) 52. with ownership among His Majesty's Government. 2000/01: 7) The number of listed companies was 16 in1986 where as it 58 . The establishment of NIDC capital market limited is also another major step to improve financial system in Nepal. as an initiator to reform the capital market. The Nepal Rastra Bank (NRB) and Nepal Industrial Development Corporation (NIDC) and its licensed members. (SEOBN-Annual Report. market intermediaries.50 million and the issued capital is Rs. NEPSE is a non-profit organization. such as broker. 10 issue managers. After the restoration of democracy in 1990. NEPSE commenced its operation on 13th January 1994. His majesty's Government. There are 27 industrial securities brokers. The main objective of NEPSE is to upgrade the infrastructure of the security exchange so that it could handle the increased activity more efficiently.89 million is subscribed by HMG/N. NRB.1 : Shareholders of NEPSE S.72 7. NIDC and Other Licensed members. of this 20.04 0.30 million.55 39.NO Shareholders Investment . the Securities Exchange Act.was 115 in 2001 but it is only 96 in 2002.16 million in 2001 but it is Rs.63 million in 2002. 1997. Since the buying and purchasing activities are done through bargaining. with it associated problems of stock availability and liquidity in order to develop stock market. NEPSE deleted some companies' name from its list because of not performing rules and regulation of capital market. 1983(first amendment). 1993 under the provision of Securities Exchange Act. In Nepal current market size of tradable security is small. The market shows continues rise till 2001 but it is little down in year 2002. NEPSE is responsible for the regulatory functions under the supervision of Security Board Nepal (SEBO/N). the price of securities is determined by the basic laws of supply and demand. The value of listed companies' shares has reached to RS. But at the end of the fiscal year 2002/03 the total number of listed companies in NEPSE is 108.2 Securities Board Nepal (SEBO/N) Securities Board. The stock exchange provides an organized market place for the investors to pay and sell securities freely. Since its' establishment. there is active biding and two-way auction trading takes place. 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. Nepal was established in May 26. 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. 1983 was amended for the second time on Jan 30. 4.1540.2344. In stock exchange. This amendment paved the way for establishing SEBO as an apex regulatory body as it widened the horizon of SEBO by bringing market intermediaries directly under its jurisdiction and also made it mandatory for the 59 . As a part of its continuous effort to build a sound system. The market for these securities is an almost perfectly competitive one because a large number of sellers and buyers participate. has launched a four-year Strategic Plan (1998-2002) with major thrust in four major policy development areas. SEBO focusing on the major areas where improvement is necessary. look after and monitor the activities of the stock exchange and of corporate bodies carrying on securities business. the primary issues as well as in the secondary trading of securities. iii) To render contribution to the development of capital market by making securities transactions fair. ii) To supervise. General objectives of SEBO: i) To promote and protect the interest of the investors by regulating the issuance. supremacy in its jurisdiction is yet to be established and clearly recognized. them for healthy trading of securities. v) To monitor and supervise the securities transactions. SEBO has also drafted a new Security and Exchange Act. 60 .corporate bodies to report to SEBO annually as well as semi-annually regarding their performance. efficient and responsible The main functions of SEBO are as follows: i) ii) iii) To advise HMG on the issues related to development of To approve stock exchanges for the operation and oversee To register and regulate market intermediaries involved in capital market and the protection of the investors' interest. which has sought to improve inconsistencies observed in the present act and establish SEBO as an apex regulator of the securities market. healthy. sale and distribution of securities and purchase. sale or exchange of securities. Although the second amendment in the act established direct relationship of SEBO with the market intermediaries and the listed companies. In order to improve such a situation. iv) To regulate public issues of securities including the mutual and trust funds. 2000/01: 2) PRESENTATION AND ANALYSIS This chapter deals with data presentation. vii) To conduct conferences. Staffing. In order to be a self-dependent institution. The Chairman is appointed by His Majesty’s Government of Nepal (HMG/N) for the tenure of four years. Governing Board. Nepal Rastra Bank (The Central Bank). Ministry of Industry. officers and supervisory and support staffs.vi) To conduct researches and studies along the area of capital market. (SEOBN-Annual Report. seminars. and participate in such programs conducted at regional or international level and join the forum and exchange with outside regulators. It is the Government's prerogative to re-appoint the chairman. As a developing regulator of the capital market. SEBO is basically relying on governments' financial assistance. if necessary. analysis and interpretation following the research methodology presented in the third chapter. Federation of Nepalese Chamber of Commerce and Industry and Nepal Chartered Accountants' Association. composed of seven members including a chairman. the data have been analyzed. Income from registration of corporate securities and registration as well as renewal of market intermediaries are its' other financial sources. In this course of analysis. Members of the Board include representatives one each from Ministry of Finance. Ministry of Law. At the end of the fiscal year 2001/2002 SEBO was manned altogether by 25 staffs including executives. By using financial and statistical tools. data gathered from various sources have been inserted in the tabular form. it has created revolving fund from which it generates income that helps to cover part of its expenses. and Funding of SEBO: SEBO is governed by a Board. workshops. The results of the copulation have also been CHAPTER – 5 61 . NWPS and observed MPS and currently distributed dividend and MPS. the relationship of MPS with previous year’s dividend (this year’s distributed dividend) is also calculated. financial and insurance companies. It showed the positive relation. DPS. 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 and observed MPS. Similarly the second is to derive multiple regression equation of EPS.1. The first one is calculation of correlationcoefficient between EPS and observed MPS. Similarly. DPS and NWPS on MPS. DPS.1 Co-relation Coefficient Analysis: Co-relation coefficient is the best measures to evaluate and examine the relationship between two variables. as the previous year’s dividend is distributed in the subsequent following year. The following table summarizes the correlation coefficient of MPS with EPS. 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. The samples of computation of each model have been included in annexes. DPS and NWPS is calculated for the selected banking and financial companies. negative relation and no relation between two variables. NWPS and with the previous years dividend or currently distributed dividend of the selected listed banking. 62 .summarized in appropriate tables. NWPS and currently distributed dividend of previous year is evaluated through two methods. 5. 85 0. MPS and NWPS and MPS and last year’s DPS S.986 0.33 0.78 0.1 Calculation of coefficient of co-relation between MPS and EPS. the relationship is negative in case of previous year’s dividend.85 Insurance The above table shows the correlation coefficient between MPS and various financial indicators as EPS. Sector Name of With EPS With DPS With With No the NWPS Last Company Year’s DPS 1 NABIL 0.06.63.06.65 0. Similarly.85 0.06 0.57 -0.34 0. NWPS and previous year’s dividend of NABIL bank are 0. Since the correlation coefficient of MPS with DPS is only 0.34 0. the result shows that distribution of dividend (previous year’s dividend in current year) of NABIL bank has negative impact its 63 .25 0.21 -0. Nepal Arab Bank Ltd (NABIL) As per the above table. Although DPS should have a strong influence in the market price. 0. This means that market price of the stock of NABIL bank during the study period was positively influenced by EPS.60 Bank Banking 4 Nepal 0.46 Finance Finance 9 Universal 0.36 Finance 11 Himalayan 0. 0.29 Chartered 3 Himalayan 0.61 No DPS 0.83 0.60 Bank 7 Annapurna -0.Table: 5.26 0.76 0. Similarly.55 -0. DPS and NWPS.85 0. NWPS and currently distributed DPS of previous year.23 Bangladesh Bank 5 Everest 0.06 0.90 Insurance Insurance 12 Everest 0.62 0. MPS and DPS. DPS has no significant relation in the movement of stock price of NABIL bank. the correlation coefficients of MPS with EPS.48 respectively.61 Finance 8 Peoples 0. The reasons behind such irrelevant result could be sampling error or the collection of only five years data for the study.75 0.74 0.64 and -0. the result is different.04 -0.97 0.64 -0.48 2 Standard 0. DPS.90 0. DPS.63 0.95 0.71 0. DPS and NWPS. Nepal Bangladesh Bank Ltd. the result shows the negative relation because of the short study period of 5 years.04. Similarly. It shows that the stock price of NB bank has strong positive correlation with its EPS. This result indicates that the relation of MPS with EPS is nearly zero or there is no relation between them. (SCB): In case of Standard Charted Bank.33. The calculation shows that NABIL bank’s stock price is more influenced by NWPS then other financial indicators. DPS and NWPS also should have same kind of relation with MPS. NWPS and last year’s dividend. As per the calculation. Himalayan Bank Limited (HBL): The market price of the stock of HBL has positive relation with its all financial indicators like EPS. its correlation 64 . The result shows that the MPS of HBL is more affected by EPS then other financial indicators. DPS. the relationship with MPS is negative. -0. 0. This theoretical concept has been proved by the calculation of correlation coefficient of MPS of NB bank with its EPS. Similarly. DPS. While considering with the last year’s dividend.21.stock price. the correlation coefficients of MPS on EPS. DPS and NWPS. DPS. NWPS and last year’s dividend is 0. dividend declaration and NWPS should have positive impact in MPS. among other financial indicators.85. (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.29 respectively. has least relationship with MPS. 0.986 is the value of correlation coefficient of MPS of NB bank with its EPS. Although.65 and 0.76.97 and 0. NWPS and last year’s dividend. 0. Standard Charted Bank Ltd. DPS of HBL. the correlation coefficient of MPS of HBL with its EPS.60 respectively. Similarly in case of other financial indicators like DPS. theoretically EPS. NWPS and last year’s dividend are 0.55 and -0. DPS and NWPS. then the result may prove the theory. 0. -0. If more years’ data were collected and then correlation was calculated. The calculated result shows that the correlation coefficient of MPS of Everest Bank with its EPS. the result shows that the change in EPS. DPS. Everest Bank Ltd. 0.: As HBL and NB bank. 0. Peoples Finance Limited (PFL): Since People Finance has not declared any dividend during the five years of the study period.34 and 0. NWPS of Everest Bank has least influence in the movement of stock price then other financial indicators.71. Annapurna Finance Limited (AFL): Due to the lack of data of 2001/02 of Annapurna Finance Co. Although EPS. This irrelevant result occurred due to the short study period. the correlation of MPS of Everest Bank with its EPS. So. it is not possible to compute co-relation coefficient of DPS with MPS. Similarly. during the four years study period. DPS and NWPS has no significant role or least role in the change of MPS of Annapurna Finance Company.26. NWPS and last year’s dividend are -0. NWPS and last year’s dividend is positive. NWPS and last year’s dividend show positive relation with MPS of the company whereas EPS shows negative relationship. 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. Among the four financial indicators.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.78. DPS.61 respectively. 0. NWPS and last year’s dividend is 0. DPS.25. DPS. But the correlation coefficient of MPS with EPS and NWPS 65 .60 respectively. only four years data was studied and analyzed.06 and 0. DPS and NWPS should have strong relationship with MPS. last year’s dividend has also significant positive relation with MPS of Everest Bank Ltd. The result states that the correlation coefficient of MPS with EPS. 0. 85. the correlation coefficient of MPS of Universal Finance with its EPS. 0. the correlation of MPS of Everest Insurance with its EPS. 0.57 and -0.62. DPS.85 respectively. 0. NWPS and last year’s dividend are 0. Universal Finance Limited (UFL): The market price of the stock of Universal Finance has positive relation with its all financial indicators like EPS.46 respectively. all the four financial indicators.83 and 0. NWPS and last year’s dividend.61. Everest Insurance: As Himalayan Insurance Company. NWPS and last year’s dividend are 0. Numerically. DPS. NWPS and last 66 . 0. Moreover the EPS of the company has the most significant relationship with MPS. The correlation of last year’s dividend with MPS is negative because only in the first year of the study period. 0.95.36 respectively.90. DPS. the MPS has also increased and when EPS decreased the MPS has also decreased. DPS.34. NWPS and last year’s dividend is positive. NWPS and last year’s dividend moves because the correlation coefficient between them is 0.75 and 0. This is because when the EPS of the company has increased. EPS.90 respectively. Himalayan Insurance: The stock price of Himalayan Insurance Company moves in the same direction as the EPS. 0.both are positive with last year’s dividend is negative. Although only four years’ data were taken for the calculation of correlation coefficient of Everest Insurance. DPS. This indicates that all the financial indicators have strong positive relationship with MPS of Himalayan Insurance Company. 0. DPS. The calculated result shows that the correlation coefficient of MPS of Everest Insurance with its EPS. the correlation coefficient of MPS of Peoples Finance with its EPS. As per the calculation. NWPS and last year’s dividend is 0.85. 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. the stock holder of Peoples Finance get dividend and for the remaining years the dividend was zero.74 and 0. 800 b3 -18.E 683. However.616 147.783 which imply that MPS does not go below that level even if EPS. However the value of b1 may vary by rupees 213.417 0.1.EPS+b2. 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.E.DPS + b3. DPS.519 9 Significa nt f 0.NWPS Table: 5.20 if the other two variables.992 61. The regression coefficient b1 represents that one rupee increase in EPS leads to an average increase in MPS by 51. DPS and NWPS are kept constant.783 23933.515 0. 5. Descripti on Coefficient Values Standard Error Significant -t a1 3074. DPS and NWPS on MPS of NABIL bank for the five years study period.836 The above table summarized results of multiple regression analysis produced by using SPSS software for determining the combined effect of EPS.920 r2 0. and NWPS on MPS of the sampled companies.2 Regression Coefficient for NABIL Bank. In other words.61 9 0.919 b1 51. Similarly. The regression constant a1 of NABIL is 3074.47 1 S. multiple regression analysis helps to establish the functional relationship between more than two variables and thereby provides a mechanism for estimation.619 as it explain by the standard error of b1.850 b2 -19. Multiple Regression Equation for NABIL Bank: MPS=a+b1. multiple regression analysis is applied here in order to analyze the combined effect of EPS. the regression coefficient b2 measures the average 67 .year’s dividend have strong positive relation with MPS of Everest Insurance Company. DPS.2 Multiple Regression Equation: In multiple regression analysis two or more independent variables are used to estimate the values of a dependent variable. and NWPS are omitted from the model.200 213.36 2 0. and NWPS are zero. The estimation of MPS might be inaccurate by Rs. is -614. the regression model is statistically insignificant at 5% level of significance as the value of significant f is 0.300 b2 49.NWPS Table: 5. The value of b3 which is equal to -18.280 which implies that MPS does not go below that level even if the values of EPS.E. the regression coefficient b2 measures the average effect of DPS on MPS.280 1479.992.90% variation in MPS is due to the other irrelevant factors.93 2 S.683.270 b3 -18. However the value of b1 may vary by rupees14. The value of b2 being -19.effect of DPS on MPS.04 0 22. produced by SPSS software.519 as the standard error of estimate.749 b1 27.3 Regression Coefficient for Standard Chartered Bank.EPS+b2. the regression constant SCB. Like wise the coefficient b3 measures the average effect of NWPS on MPS. Like wise the coefficient b3 measures the average effect of NWPS on MPS.05.094 5.431 0.964 if the other two variables.992 indicates that one rupee increase in DPS leads to a decrease in MPS by Rs. The coefficient of determination r 2 explains that 47.DPS + b3. a1.992.040 indicates that an 68 . Similarly.E 285. DPS and NWPS are kept constant.616. Descripti on Coefficient Values Standard Error Significant –t a1 -614.616 indicates that an average increase in NWPS by one rupee leads to decrease in MPS by 18. holding the two other variables constant.19. However negative MPS is ridiculous in practice.273 as it explained by the standard error of b1.10% variation in MPS is accounted for by the variation in EPS.328 As per the above table of Multiple Regression Analysis. Similarly. holding the two other variables constant. The regression coefficient b1 represents that one rupee increase in EPS leads to an average increase in MPS by 27. The value of b2 being -19.836 which is greater than 0.15 6 0. The value of b3 which is equal to 49.030 1 Significa nt f 0. DPS.19.964 14.273 0. Multiple Regression Equation for Standard Chartered Bank: MPS=a+b1.992 indicates that one rupee increase in DPS leads to a decrease in MPS by Rs.135 0. DPS and NWPS and 52.176 r2 0. EPS and NWPS are left constant.20% variation in MPS is caused by the variation in EPS.021 11. Similarly.434 b1 12.4 Regression Coefficient for Himalayan Bank. Like wise the coefficient b3 measures the average effect of NWPS on MPS.032.499 r2 0.0301. and NWPS are zero.492 As shown in the above table.098 0.071 as it explained by the standard error of b1.average increase in NWPS by one rupee leads to increase in MPS by 49. the multiple relationship as explained by this model is statistically insignificant at 5% level because significant value of F is 0.591 b2 7. whereas 6. However the value of b1 may vary by rupees16.455 b3 11. The standard error of estimate of that model reveals the fact that the estimation of MPS might vary by Rs. DPS. However negative MPS is ridiculous in practice. whereas 15.E.NWPS Table: 5. holding the two other variables. DPS and NWPS are kept constant. the regression coefficient b2 measures the average effect of DPS on MPS. The coefficient of determination r2 explains that 84.7.004 0. The value of b2 Rs.20% variation in MPS is caused by the variation in EPS. Multiple Regression Equation for Himalayan Bank ltd: MPS=a+b1. The regression coefficient b1 represents that one rupee increase in EPS leads to an average increase in MPS by 12.285.67 1878.80% variation 69 . The coefficient of determination r2 explains that 93. DPS and NWPS respectively.67 which implies that MPS does not go below that level even if the values of EPS.DPS + b3.032 6.84 2 S.241 6 Significa nt f 0. Similarly.040.05.032 indicates that one rupee increase in DPS leads to an increase in MPS by Rs. The value of b 3 which is equal to 11.7.E 312.328 which is greater than 0.031. Description Coefficient Values Standard Error Significant –t a1 -231. DPS and NWPS respectively.031 indicates that an average increase in NWPS by one rupee leads to increase in MPS by 11.EPS+b2.39 4 0.018 16.071 0.018 if the other two variables.80% variation in MPS is due to the other extraneous factors. the regression constant a1 of HBL is -231. 851 b3 6.123 1 Significa nt f 0.NWPS Table: 5.EPS+b2. for the five years study period. However negative MPS is ridiculous in practice. Descripti on Coefficient Values Standard Error Significant –t a1 -500.508 0.193 The above table shows the summarized results of multiple regression analysis produced by using SPSS software for determining the combined effect of EPS.154 0. and NWPS are equal to zero.509 5. 2.120 indicates that an average increase in NWPS by one rupee leads to increase in MPS by 6.E 152.1321 as the standard 70 . The value of b2. The coefficient of determination r2 explains that 97.40 6 0. The estimation of MPS might be inaccurate by Rs. Multiple Regression Equation for Nepal Bangladesh Bank Ltd: MPS=a+b1.519 which implies that MPS does not go below that level even if EPS. the relationship established by this model is insignificant at 5% level. The regression coefficient b1 represents that one rupee increase in EPS leads to an average decrease in MPS by -2.120.E. DPS and NWPS and 2.957.05.in MPS is due to the other extraneous factors. DPS and NWPS are kept constant.957 indicates that one rupee increase in DPS leads to an increase in MPS by Rs.152.380 0.2416 and as the significant F value is 0.70% variation in MPS is accounted for by the variation in EPS. DPS and NWPS on MPS of NB Bank Ltd.49 which is more than 0.DPS + b3.30% variation in MPS is due to the other irrelevant factors. The value of b3 which is equal to 6.519 1141. However the value of b1 may vary by rupees 5. The regression constant a1 of NB Bank is -500. The standard error of estimate of that model reveals that the estimation of MPS might vary by Rs.154 as it explain by the standard error of b1.120 6. Like wise the coefficient b3 measures the average effect of NWPS on MPS.2. DPS.712 b2 2.737 b1 -2.97 7 S.957 12. by leaving the two other variables as constant. the regression coefficient b2 measures the average effect of DPS on MPS.5 Regression Coefficient for Nepal Bangladesh Bank.520 r2 0.509 if the other two variables. Similarly.312. 5893.416 b3 -4.00% variation in MPS is due to the other extraneous factors.375 0.EPS+b2. DPS and NWPS on MPS of Everest Bank Ltd. Similarly. The coefficient of determination r2 explains that 94.684 341. DPS and NWPS respectively. The regression constant a1 of EBL is -376. whereas 6. Multiple Regression Equation for Everest Bank Ltd: MPS=a+b1. However the value of b1 may vary by rupees 22. The standard error of estimate of that model reveals that fact that the estimation of MPS might vary by Rs. DPS. the multiple relationship as explained by this model is statistically insignificant at 5% level because significant value of F is 0. Similarly.589 3 Significa nt f 0.6 Regression Coefficient for Everest Bank.029 0.E 153.05. DPS and NWPS are kept constant. and NWPS are zero.336 if the other two variables.94 0 S.19 which is greater than 0. Like wise the coefficient b 3 measures the average effect of NWPS on MPS. Descripti on Coefficient Values Standard Error Significant –t a1 -376.415 3.00% variation in MPS is caused by the variation in EPS. for the five years study period.DPS + b3.153. the relationship established by this model for Everest Bank’s MPS is insignificant at 5% level.263 4.error of estimate. 71 .E. the regression coefficient b2 represents that one rupee increase in DPS leads to an average increase in MPS by 5.NWPS Table: 5.684 which implies that MPS does not go below that level even if the values of EPS. The regression coefficient b1 represents that one rupee increase in EPS leads to an average increase in MPS by 54.263 if the other two variables.116 as it explained by the standard error of b1.05.336 22.415. As the significant F value is 0.390 r2 0.309 The above table shows the outcomes of multiple regression analysis produced by using SPSS software for determining the combined effect of EPS. EPS and NWPS are kept constant. -4.469 b1 54. However negative MPS is ridiculous in practice.415 indicates that an average increase in NWPS by one rupee leads to decrease in MPS by 4.309 which is more than 0.246 b2 5.105 0. The value of b3.116 0. EPS+b2. DPS and NWPS 72 .E.204 for b1 represents that one rupee increase in EPS leads to an average decrease in MPS by Rs.457 4 Significa nt f 0. 25. However the value of MPS may vary by Rs. DPS and NWPS on MPS of Annapurna Finance Company Ltd.7 Regression Coefficient for Annapurna Finance. The regression constant a1 of Annapurna Finance is 232.NWPS Table: 5.909 b3 0.381 9.184 indicates that an average increase in NWPS by one rupee leads to increase in MPS by Rs.96 as it explains by the standard error of b1. Generally EPS should have positive influence in MPS but the result here derived shows the negative because of the short study period.995 b2 1.Multiple Regression Equation for Annapurna Finance Ltd: MPS=a+b1.982 The above table shows the summarized results of multiple regression analysis for determining the combined effect of EPS.917 2121.381 indicates that one rupee increase in DPS leads to an increase in MPS by Rs.917 which implies that MPS does not go below that level even if EPS. 1. the regression coefficient b2 measures the average effect of DPS on MPS. Descripti on Coefficient Values Standard Error Significant –t a1 232. DPS.381.585 0.991 r2 0.930 b1 -0. The coefficient of determination r2 explains that 12.00% variation in MPS is accounted for by the variation in EPS. and NWPS are equal to zero. for the five years study period. 1.96 0.204 if the other two variables.719 0.184. 12.948 0.585 and Rs. DPS and NWPS are kept constant. Like wise the coefficient b3 measures the average effect of NWPS on MPS. The value of b3 which is equal to 0. 0. The value of b2. 0. However the value of MPS caused by EPS may vary by rupees Rs.DPS + b3.204 25. The regression coefficient -0.12 S. Similarly. 9. by leaving the two other variables as constant.184 12.948 by the effect of DPS and NWPS separately as the standard error of b2 and b3 shows it.E 386. and NWPS are zero.05.643 if the other two variables.643 0.548 b2 b3 0.714 0.E 87. The value of b3 which is equal to 0.8 Regression Coefficient for Peoples Finance.and 88% variation in MPS is due to the other irrelevant factors. the effect of DPS on MPS could not explained and left blank as above.182 which implies that MPS does not go below that level even if the values of EPS. the multiple relationship as explained by this model is statistically insignificant at 5% level because significant value of F is 0. Due to the non declaration of cash dividend during our study period by the co. The regression constant a1 of PFCL is 120.98 which is greater than 0.182 96. for the five years study period.977 0.897 as due to the standard error of b1. DPS. 0. DPS and NWPS are kept constant. DPS and NWPS on MPS of Peoples Finance Company Ltd.DPS + b3.20% 73 .977 due to the standard error explained in b3. Similarly.340 b1 0. Whereas it may vary by Rs. However the value of b1 may vary by rupees0.NWPS Table: 5.46 2 S.897 0.575 0. The regression coefficient b1 represents that one rupee increase in EPS leads to an average increase in MPS by 0.E. the regression coefficient b2 measures the average effect of DPS on MPS. Similarly. Descripti on Coefficient Values Standard Error Significant –t a1 120.538 The above table shows the outcomes of multiple regression analysis produced by using SPSS software for determining the combined effect of EPS.575. Multiple Regression Equation for Peoples Finance Ltd: MPS=a+b1.616 r2 0.575 indicates that an average increase in NWPS by one rupee leads to increase in MPS by 0.EPS+b2. Like wise the coefficient b3 measures the average effect of NWPS on MPS.4083 Significa nt f 0. The coefficient of determination r2 explains that 46. 804 1. DPS and NWPS respectively.E.NWPS Table: 5. Similarly.236 0.804 indicates that one rupee increase in DPS leads to an increase in MPS by Rs.236 indicates that an average increase in NWPS by one rupee leads to increase in MPS by 3. EPS and NWPS are left constant.variation in MPS is caused by the variation in EPS.E 15.552 0.197 if the other two variables.123 as it explained by the standard error of b1. Rs. the coefficient b3 measures the average effect of NWPS on MPS.197 3. Description Coefficient Values Standard Error Significant -t a1 139. and NWPS are zero.7. Ltd.0772 Significa nt f 0. However the value of b1 may vary by rupees 3. DPS and NWPS are kept constant.98 9 S.828 44.119 b3 3.828 which implies that MPS does not go below that level even if the values of EPS. the regression coefficient b2 measures the average effect of DPS on MPS.90% variation in MPS is caused by the variation in EPS. DPS and NWPS respectively. DPS.804.476 0. The coefficient of determination r2 explains that 98.108 r2 0.134 As above table explains the multiple regression analysis to determine the combine effect of EPS. The regression constant MPS (a1) of UFCL is 139.1.103 b2 7.10% variation in MPS is due to the other 74 .80% variation in MPS is due to the other extraneous factors. Multiple Regression Equation for Universal Finance Ltd: MPS=a+b1.9 Regression Coefficient for Universal Finance.538 which is more than 0.4083.236. The value of b2. whereas 1. DPS and NWPS on MPS computed by SPSS software of Universal Finance Co.05. The standard error of estimate of that model reveals that fact that the estimation of MPS might vary by Rs. holding the two other variables.DPS + b3. The relationship explained by this model for Peoples Finance is insignificant at level of 5% because the significant F value is 0. Like wise.123 0. The value of b3.476 due to the standard error. The regression coefficient b1 represents that one rupee increase in EPS leads to an average decrease in MPS by 19. during the five years study period. However the value of DPS may vary by Rs. whereas 53.387 0.7. 3.87.196 b1 -19.EPS+b2. 330 The above table depicts the summarized results of multiple regression analysis produced by using SPSS software for determining the combined effect of EPS.6175 Significa nt f 0.798 0.662 b3 0. Multiple Regression Equation for Himalayan General Insurance: MPS=a+b1.399. The standard error of estimate of that model reveals that the estimation of MPS might vary by Rs. However the value of b1 may vary by rupees 4. The regression constant a1 of HGICL is 7.213.E 46. The value of b3 which is equal to 0. However it may vary by Rs. the relationship established by this model is significant only on the level of 13. Like wise the coefficient b3 measures the average effect of NWPS on MPS.0772.134.10 Regression Coefficient for Himalayan General Insurance.129 4.735 389.854 as it explain by the standard error of b1.399 indicates that an average increase in NWPS by one rupee leads to decrease in MPS by 0.213 5. the regression coefficient b2 measures the average effect of DPS on MPS.EPS+b2. Description Coefficient Values Standard Error Significant –t a1 7. As the significant F for the Universal Finance is 0. DPS and NWPS on MPS of Himalayan General Insurance Co.93 1 S.extraneous factors.343 b2 -3.854 0.15.129 if the other two variables.E.The coefficient of determination r2 explains that 93.4% and it is insignificant at the level of 5%. Ltd.480 0.933 r2 0. holding the two other variables constant. Similarly. DPS and NWPS are kept constant.759 0.5. The value of b2 being -3. DPS.10% variation in MPS is caused by the variation in EPS.90% variation in MPS is due to the other irrelevant factors. The regression coefficient b1 represents that one rupee increase in EPS leads to an average increase in MPS by 8. and NWPS are zero.480 due to the standard error of b2.NWPS Table: 5. for the five years study period.DPS + b3.987 b1 8.735 which imply that MPS does not go below that level even if the value of EPS. The estimation of MPS might be inaccurate by 75 .399 3. DPS and NWPS and 6.3.213 indicates that one rupee increase in DPS leads to a decrease in MPS by Rs. 6175 as the standard error of estimate. the relationship established by this model is insignificant at 5% level.8% variation in MPS is caused by the variation in EPS.16 b1 16.11 Regression Coefficient for Everest Insurance.DPS + b3. However the value of b1 may vary by rupees 0.942 0. 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.119 0. DPS and NWPS respectively. The regression coefficient b1 represents that one rupee increase in EPS leads to an average increase in MPS by Rs. 8.33 for Himalayan General Insurance which is more than 0. 7. The value of b3. DPS and NWPS on MPS of Everest Insurance Company for the five years study period.161 indicates that an average increase in NWPS by one rupee leads to increase in MPS by Rs. As the significant F value is 0. The coefficient of determination r2 explains that 92.256 0. the regression coefficient b2 represents that one rupee increase in DPS leads to an average increase in MPS by Rs. whereas 7.2% variation in MPS is due to the other extraneous factors.05. 7.431 0.40 The above table shows the combined effect of EPS.161 0.9327 Significa nt f 0.Rs. Similarly. Multiple Regression Equation for Banking Sector: MPS=a+b1.92 8 S.E. and NWPS are zero.18 r2 0.NWPS 76 .240 0. EPS and NWPS are kept constant.46.EPS+b2.DPS + b3.161. DPS. DPS and NWPS are kept constant.240 if the other two variables. As the significant F value is 0.40 which is more than 0.115 133. 16.E 0.256 if the other two variables.942 as it explained by the standard error of b1.NWPS Table: 5.19 b3 7.05. Like wise the coefficient b3 measures the average effect of NWPS on MPS. Multiple Regression Equation for Everest Insurance: MPS=a+b1.452 0. the relationship established by this model for Everest Insurance Co’s MPS is insignificant at 5% level.13 b2 8.EPS+b2. Descripti on Coefficient Values Standard Error Significant –t a1 554. 357 increase in MPS of the whole banking sector if other two variables are kept constant. The value of standard error of b 2 and b3 is 3. the irrelevant result occurred due to the short study period.746 if NWPS is increased by Rs.Table: 5.114 r2 0. 1 and other two variables are kept constant for each case. DPS and NWPS whereas 38. The regression coefficient b1 is 14.357 4.492 0.275 respectively.519 in average if DPS is increased by Rs.746 respectively. which indicate that the value of MPS by the impact of DPS and NWPS could vary by Rs.040 b1 14.035 in average even if EPS. However the standard error for b1 shows that the MPS might vary by Rs.357 which imply that one rupee change in EPS leads to the average of about Rs.825 and 2.825 and Rs.DPS + b3. But the standard error of estimate of the model reveals that the estimation of MPS may vary by Rs.NWPS 77 . 2.9% variation in MPS is due to the variation in EPS.251 b3 -3.895.EPS+b2. 4. The regression constant a with the value of 652.895 0. Similarly the regression coefficient b2 and b3 is 4.008 b2 4. 14. the significant F value is 0 which is less than 0. Although increase in NWPS should not decrease the value of MPS.746 2.519 and -3. 1 and the MPS will decrease by Rs. 4. 3. The coefficient of determination (r2) explains that 61. Descripti on Coefficient Values Standard Error Significant –t a1 652. DPS and NWPS have value of zero.12 Regression Coefficient for Banking Sector.035 indicates that MPS of banking sector does not go below Rs. 355.825 0.035 298. 3.05.E 355 Significa nt f 0 The above table shows the outcomes of multiple regression analysis for the banking sector.519 3.275 respectively. The regression model is statistically significant at 5% level of significance as Multiple Regression Equation for Finance Sector: MPS=a+b1.61 9 S.E. This indicates that the MPS of banking sector will increase by Rs.275 0. 652.1% variation in MPS is caused by other external factors. 492 0. the coefficient b3 measures the average effect of NWPS on MPS. 0.777 b2 0. and NWPS are zero.147 which indicates that the relationship established by this model is significant only on the level of 14. Since the impact of EPS. EPS and NWPS are left constant. The regression constant of MPS (a) of finance sector is 75. However the value of b1 may vary by rupees 1. whereas 59.633 76. DPS. DPS and NWPS on MPS computed by SPSS software of the selected companies of finance sectors so that they could represent whole finance sector. 0.554 0.425 1. holding the two other variables. Description Coefficient Values Standard Error Significant –t A 75.E 131. The coefficient of determination r2 explains that 40. 0. The regression coefficient b1 represents that one rupee increase in EPS leads to an average increase in MPS by Rs. 1.879 0. Similarly. Like wise.425 indicates that one rupee increase in DPS leads to an increase in MPS by Rs. this derived result seems irrelevant.364 1. Similarly.765 0.7% and it is insignificant at the level of 5%.364 if the other two variables.252 0.425. DPS and NWPS are kept constant. During the five years study period. DPS and NWPS in MPS should be maximum then other external factors.147 The above table explains the multiple regression analysis to determine the combine effect of EPS.Table: 5.252 as it explained by the standard error of b1.13 Regression Coefficient for Finance Sector.879 indicates that an average increase in NWPS by one rupee leads to increase in MPS of finance sector by Rs.9% variation in MPS is due to the other extraneous factors. The value of b2.1% variation in MPS of finance sector is caused by the variation in EPS. 75.277 r2 0.879.547 Significa nt f 0.0.554 due to the standard error. 0. 78 . DPS and NWPS respectively. However the value of DPS may vary by Rs.E. This occurs because of the short study period.40 1 S.790 b3 0. the significant F for the financial sector is 0. The value of b3.633 even if the values of EPS.346 b1 0.633 which imply that MPS does not go below Rs. the regression coefficient b2 measures the average effect of DPS on MPS. and NWPS are zero.60% variation in MPS of the financial sector is caused by the variation in EPS. The standard error of estimate of that model reveals that the estimation of MPS might vary by Rs.E. 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.613 0. Like wise the coefficient b3 measures the average effect of NWPS on MPS. However the value of b1 may vary by rupees 7.580 b3 0.14 Regression Coefficient for Insurance Sector.923 b1 4.52 3.591 9.Multiple Regression Equation for Insurance Sector: MPS=a+b1. The value of b3 which is equal to 0.581 b2 5. DPS.52. The value of b2.95 which implies that MPS does not go below Rs.NWPS Table: 5.80 6 S.591. Similarly.87 r2 0. DPS and NWPS respectively.613 and as the significant F value is 0.E 72. DPS and NWPS are kept constant. whereas 19.275 Significa nt f 0.453 0.031 which is less than 0.591 indicates that one rupee increase in DPS leads to an increase in MPS of finance company by Rs.448 0. The coefficient of determination r2 explains that 80. Descripti on Coefficient Values Standard Error Significant –t a1 -30.95 for the insurance sector in average even if the values of EPS. EPS and NWPS are left constant. -30. 0. holding the two other variables.027 0. 4.05.397 if the other two variables.EPS+b2. the relationship established by this model is significant at 5% level. the regression coefficient b2 measures the average effect of DPS on MPS.397 7.951 305.40% variation in MPS is due to the other extraneous factors.031 As shown in the above table. 5.453 as it explained by the standard error of b1. 5. the regression constant a 1 of insurance sector is -30.52 indicates that an average increase in NWPS by one rupee leads to increase in MPS by Rs. However negative MPS is ridiculous in practice and such impractical result occurs due to the sampling error.DPS + b3.305. 79 . 558 which imply that one rupee change in EPS leads to the average of about Rs.050 b2 5. 5. which indicate that the value of MPS determined by the above model due to the cause of DPS and NWPS could vary by Rs. 1 and the MPS will increase by Rs. DPS and NWPS whereas 39. However the standard error for b1 shows that the MPS might vary by Rs. The value of standard error of b2 and b3 is 2.DPS + b3.839 0.472 respectively.565 and 0.839. This indicates that the MPS of banking sector will increase by Rs.609 and 1. Finance and Insurance Sector: MPS=a+b1. Similarly the regression coefficient b2 and b3 is 5.527 162.3% variation in MPS of the whole sector is due to the variation in EPS. 2. 80 . 101.778 r2 0. DPS and NWPS have value of zero. finance and insurance sector does not go below Rs. 0.E 364.039 b3 0. insurance and finance sector.60 3 S. 1.536 b1 5.417 respectively. But the standard error of estimate of the model reveals that the estimation of MPS may vary by Rs.565 in average if DPS is increased by Rs. Regression Coefficient for Banking.472 0.558 2.417 1.527 in average even if EPS. 1 and other two variables are kept constant for each case.6 Significa nt f 0 The above table shows the outcomes of multiple regression analysis for the whole banking. 5.558 increase in MPS of the whole banking and insurance sector if other two variables are kept constant.15.527 indicates that MPS of whole banking. The regression coefficient b1 is 5.565 2. 2.7% variation in MPS is caused by other external factors.05.NWPS Table: 5. The regression model is statistically significant at 5% level of significance as the significant F value is 0 which is less than 0.609 and Rs. The coefficient of determination (r2) explains that 60.755 0. Finance and Insurance Sector. Descripti on Coefficient Values Standard Error Significant –t a1 101. 162.472 respectively.417 if NWPS is increased by Rs.E.755.Multiple Regression Equation for Banking.EPS+b2.609 0. The regression constant a with the value of 101. 3 0 2.2 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.86% 61.24% 19.5.97% 31.6% 11.39% 16.6 0 2.6 5 + ( Rm − R f ) β j Annapurna Finance Peoples 7 Finance Finance 8 Universal Finance 9 Himalayan Insurance Insuranc e 10 Everest Insurance Required Rate of Return(R)= R f if R>Rj then the stock is under valued if Rj>R then the stock is over valued 81 .81% 44.8 3 1.8 6 0.06% 23.6 2 1.2 8 0.64% 20. Similarly. Status of the Market Price of the Shares of the Sample Companies S.9 2 2.18% 27.12% 10.82% 29. The detailed calculation of required rate of return and Actual rate of return is presented in Annex. 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.29% 24. No Bet a ( Required Rate of Return (Rj) 14. if the required rate of return equals actual rate of return then that stock is called equilibrium priced.4 9 2.14% Status of the stock of the company Undervalue d Undervalue d Undervalue d Undervalue d Undervalue d Undervalue d Undervalue d Undervalue d Overvalued Undervalue d Sector Name of the Company βj 1 2 3 4 5 6 Banking NABIL Standard Chartered Himalayan Bank Nepal Bangladesh Bank Everest Bank ) 1.16.45% 43. Table: 5.56% Actual Rate of Return (R) 30.3 5 2.33% 20.63% 30.78% 48.36% 63.89% 17. the required rate of return of SCB is 11. In the same ground the required rate of return of HBL is 10. In the same way the required rate of return and actual rate of return of Peoples Finance during the study period is 20. Since the price of the stock of HBL is also undervalued. Since the actual rate of return is higher than the required rate of return.64% and actual rate of return during the study period is 44. In the same line the required rate of return of NB bank is 17. It reveals that the actual rate of return of such co.39% and the actual rate of return is 63.From the above summarized table. is also undervalued. Hence the actual rate of return is higher than the required rate of return. Since the stock of Everest Bank Ltd.89% and the actual rate of return is Rs.82% during the study period.81%.33% and actual rate of return is 61. Similarly.86% during the study period.24% during the study period. is 16. In the same ground the required rate of return of Everest Bank Ltd.06% during the study period.36%. the price of the stock of NABIL bank is called undervalued. 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. It implies that the actual rate of return is more than the required rate of return. It shows that the actual rate of return is also higher than the required rate of return during the study period.19. Thus it can be concluded that the stock of Annapurna Finance is undervalued. Hence the required rate of return is less than the actual rate of return since the price of stock is called under priced. Universal Finance & Capital Markets Ltd.78% during the five years study period. is 24.29 % and 27. is higher than 82 . The actual rate of return is higher than the required rate of return.18%.6% where as actual rate of return is 30.e. the price of stock of SCB is also called undervalued.63% and 48. As well as the required rate of return and actual rate of return of another finance co. the required rate of return of NABIL bank is 14.12% whereas actual rate of return is 23. Similarly the required rate of return of Annapurna Finance is 20. i. Hence it can be concluded that the stock of Himalayan General Insurance Co. one i. Similarly the required rate of return of Himalayan General Insurance Co. 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. The required rate of return of Everest Insurance Co. From above table in summarize it was found that the 5 banks taken as samples all were under-priced. So such price of stock of such company is called undervalued. as calculated above is 30. 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.e. is called overvalued during this study period. during the study period is calculated 31. Hence the actual rate of return is higher than the required rate of return .43%. Likewise. Similarly the status of among two insurance companies taken as sample companies. So. was found overpriced and another one was found under-priced. Himalayan General Insurance Co.45% during the study period.97% and the actual rate of return is 29. 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. It makes the actual rate of return of the sampled companies high and the required 83 .56% and the actual rate of return during the same period is 41.Therefore it can be concluded that the stock of Everest Insurance Co.the required rate of return in the same period. during the study period is called undervalued. None of the sample companies shares were equilibrium priced since the sample company’s shares was not found reasonably priced during the study period. among the three finance companies taken as sample the stock of all finance companies are under-priced during the study period. It shows that the required rate of return is greater than the actual rate of return during the period. 969 6. 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.262 2.262 2. 5.262 2.3647 2. So.0724 Accepted Rejected 84 .447 1.262 Calculated Tvalue 1. most of the sampled companies’ share price become undervalued during the study period. Result from t-test S.0429 Remarks Null Hypothesis Accepted Rejected Accepted 4 5 2. 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. As.e.88 3.rate of return low. 2003 Five Major political parties' movement Tabulated Tvalue 2. The calculated required rate of return of the companies is low because of taking few years data for calculation.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. the calculated required rate of return of the sampled companies seems too low to invest for the investors. These event wise data has been analyzed with the help of paired t-test. 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. 2059 Rupture of peacetalk and restarting war at Bhadra-10 .N o 1 2 3 Events(Researc h Variable) Ashwin-18. 2060 Nepal's entry on WTO on Sep-11.17.2059 event Ceasefire on Magh 15. 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. Similarly. null hypothesis is accepted and alternative hypothesis is rejected. the calculated value of t is 1. less than tabulated value. the following chart shows that the NEPSE index in decreasing trend before the event and it start to increase after the event. 5 for 6 degree freedom at 5 % level of significance level is 2. Chart: 5.1-4) at 5 % level of significance is 2. The null hypothesis is accepted because the increasing and decreasing trend is within the 5% level of significance. 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 started thinking positively and hence the NEPSE index has risen during the period of ceasefire.1 NEPSE Trend For previous 10 and next 10 days of Ashoj 18 first 10 days next 10 days 224 223 222 221 220 219 218 217 216 215 214 1 2 3 4 5 Days NEPSE index 6 7 8 9 10 Ceasefire between Maoist and Government and start of peace talk brought some sort of peace in that time in the country.From the above table it is clear that from the paired t-test. S. It means that the signaling factors on the event of this Ashwin 18.969.262 and last one.No. While considering the event of Ashwin 18. 2059 has not affected the price of the stock based on the analysis of above data. the tabulated value at 9 degree freedom for above first 4 events (S.447. So.No. 85 . 2059. Although the null hypothesis is accepted. Chart: 5. Hence the null hypothesis was rejected at 9 degree freedom at 5 % level of significance. 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.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. 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. 2060 the NEPSE index starts to go down which can be seen in the following chart also. So there is significant change in share price before and after the event of ceasefire and start of peace talk in the nation.2 NEPSE Trend For previous 10 and next 10 days of Ceasefire on Magh 15 first 10 days next 10 days 230 225 220 215 NEPSE Index 210 205 200 195 190 185 180 1 2 3 4 5 Days 6 7 8 9 10 As Maoist violated the ceasefire and then the re-war has started in the country in Bhadra 10. The result 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 86 . It revels that the cease fire even has played the vital role in change in the share price. So. 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. Although the chart shows that the price index has increased slightly after the event.3 NEPSE Trend For previous 10 and next 10 days of Re-War on Bhadra 10 first 10 days next 10 days 214 212 210 NEPSE Index 208 206 204 202 200 198 196 1 2 3 4 5 Days 6 7 8 9 10 While considering the event of the declaration of Nepal’s entry in WTO. the null hypothesis is accepted. So. 2060 (11-Sep. 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. on Bhadra-25. So the market index in NEPSE was affected before the date of actual event. 2060 can also be presented in the following chart. 2003). So.two weeks of the actual event. 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. 87 . the calculated value of t is 1.88. lower than tabulated value. 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. null hypothesis is accepted and alternative hypothesis is rejected. it is still under the 5% level of significant. Chart: 5.4 N PSEtrend for previous 10 and next 10 days of N E epal's entry in W TO first 10 days next 10 days 212 210 208 Index 206 204 202 200 198 196 1 2 3 4 5 D ays 6 7 8 9 10 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 88 NEPSE Index for Previous 7 Months and Next 7 Months of Five Parties' Movement 230 225 220 NEPSE Index 215 210 205 200 195 190 185 1 2 3 4 Months 5 6 first 7 months Next 7 months 7 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 Pattern Response Yes No Total No. Of Investors 64 19 83 % 77% 23% 100 89 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 Security Sector Bank 35 Finance Co. 11 Insurance Co 9 Manufacturing 2 Trading 3 Hotel 1 Others 3 Total 64 Non Securities Sector Bank Fixed Deposit 7 % 55% 17% 14% 3% 5% 2% 5% 100% 37% 90 Weight ed 77% e.e. 23 of them i. 36% of the respondents said they own shares for dividend. Out of 64 respondents who have invested in shares. 64% of the respondents have never sold any shares in secondary market they have owned. Among the 64 respondents who invested in shares.e. It revels that major of the respondents own shares of companies for price appreciation. c) Price Appreciation and d) To become director. 0% 23. 91 .Fixed Assets Business Venture Others Total Grand Total 9 1 2 19 83 47% 5% 11% 100% 23% 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. 51% Divid e nd Socia l Statu s Price Ap pre cia tion To be co m e d irecto r 8.e. 33 which is 52% of the total respondents own shares for price appreciation in future. Similarly 8 of the respondents i. 13% own shares in lieu of social status in the society and major of the respondents. b) Social Status. 23 i. The following chart summarize above description. 36 % of the respondents have sold their shares in secondary markets and 41 i. None of the respondents were interested to own shares to become director of company. Chart: 5. 13% Trading of Shares in the Secondary Market: Investors were asked if they have ever sold their shares in secondary market or not.6 Purpose of Ow ning Sha res 0. 36% 33. Of the total 64 investors who invest their money in securities. Chart: 5. 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. 7 which is 30% have sold their shares to fulfill their emergency personal needs. Of the total 23 investors who sold their shares in secondary market. 18 that is 28 % have purchased shares from secondary 92 . which is 9% were sell their securities due to no payment of dividend by the company. b) To buy other stocks c) Expectation of price fall. It was found that the cause to sell the securities to buy other securities and expectation of future price fall is equal. The no of respondents is 8.7 Reasons for selling shares in secondary market Emergency Personal Need To buy other securities 8 35% Expectation of future price fall No payment of dividend 7 30% Current price appreciation 9% 13% 13% 2 3 3 The next question for the investors was if they have bought shares from secondary market.20. Of investors 23 41 64 % 36% 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. Majority of the respondents sold their shares because of current price appreciation.N o 1 2 Research variables Yes No Total No. Investors Trading in Secondary Market S.Table: 5. 35%. In the same ground 2. d) No payment of dividend by the company and e) Current price appreciation. 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. 6 that is 33% purchased the shares to get the higher rate of dividend declared by the company. Similarly. 93 . 21 i. monthly. one question was presented as how often the investors seek the prices of securities they have purchased. 4 i. 4 which is 22% of the investors who purchased shares from secondary market for speculative purpose. Similarly.N No. Research Variables investors % 1 2 3 4 For high rate of dividend Expected price appreciations To invest excess money Speculative purpose Total 6 7 1 4 18 33% 39% 6% 22% 100% Investors Interest on Price of the Shares To know the interest of investors towards their shares’ price.e. Causes for Investing in Secondary Market S. 27 i.e. 42%.No Research . variables No. 12 which is 19% of the total investors told that they look for the price of their securities daily. Of o. 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. Table: 5. Of the total 64 respondents.market and 46 that is 72% of them have not purchased shares from secondary market. 6%. This result has been expressed in the following table.22.21. 33% and 2 i. Investors Purchasing Shares form Secondary Market S.e.e. Table: 5. Of investors % 1 2 Yes No Total 18 46 64 28% 72% 100% Similarly. 7 which is 39% of them invested their money in shares through secondary market because of the future expected price gain. 3% of the investors seek the price of their shares weekly. Table: 5. question was presented to the respondents as the level of return from the investment presently getting in comparison their 94 .24. Factors Affecting Price of Shares 1 2 3 4 5 6 7 Research variables Dividend Earning Per Share Political Stability Economic Growth World Wide Trend Volume of Transactions Rumors Total No. Table: 5. Of investors 12 27 4 21 2 64 % 19% 42% 6% 33% 3% 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. Theoretically. Of investors 26 19 11 14 5 2 6 83 % 31% 23% 13% 17% 6% 2% 7% 100% Investors Views Regarding the Returns from their Investment To find out how much the investors are satisfied from the returns from their investments. 2 which is 2% of the respondents said volume of transactions and 6 which is 7% said rumors.23. 26 of the total 83 respondents. DPS and EPS are the major factors to influence the share price of a company which is also reflected in the respondent’s view.N o 1 2 3 4 5 Research variables Daily Weekly Monthly Seldom Never Total No. that is 31% gave their views as dividend as the influencing factors. 19 that is 23% said earning per share. Investors Seeking for Share Price S. The result of this question is presented in the following table.14 which is 17% said economic growth of the country. 5 that is 6% said world wide trend. 11 which is 13% said political stability of the country.seldom and never respectively. variables investors % 1 2 3 4 5 Very High High Moderate Low Very Low Total 0 5 22 25 12 64 0% 6% 27% 30% 14% 100% 5. the DPS and NWPS of NABIL bank is negatively influenced 95 . the three financial indicators. Disregarding the exceptional case.N Research No. similarly 22 that is 27% said moderate. EPS. Similarly.25. The results is presented in the following Table: 5. Satisfaction form the Return of Shares S. Universal finance. NB bank. NWPS is positive and with last year’s dividend is negative. the relationship of MPS on EPS. According to the multiple regression. Of o. NWPS and last year’s dividend. in case of NABIL bank and Peoples Finance. 2. for the Annapurna Finance the relationship of MPS with EPS is negative where as the relation is positive with DPS. DPS and NWPS has good positive relationship with MPS and EPS is the most influencing factor among them. Everest bank. DPS. NWPS and current year’s DPS of HBL. According to the coefficient of co-relation the relationship of MPS on EPS. during the five years study period. 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. 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. NWPS and last year’s dividend is negative and there exists no relation with EPS. it is found from the calculation of correlation coefficient that in average for all companies.expectation. 25 that is 30% low and 12 that is 14% very low.5 The Major Findings: The major findings based on the analysis are presented as follows: 1. In case of SCB. Similarly. Himalayan General Insurance and Everest Insurance are all positive. DPS. 05.836).80% change in MPS is caused by other external factors. DPS and NWPS of NABIL bank is 47.MPS. DPS and NWPS and only 7.49 which is greater than 0. 6.19 which is greater than 0. DPS and NWPS. 96 . The regression model is statistically insignificant at 5% level of significance as the value of significant f is 0. The regression model is statistically insignificant at 5% level of significance as the value of significant f is 0.05. DPS and NWPS. the analysis shows that the combined effect on MPS of EPS.05. The regression model is statistically insignificant at 5% level of significance as the value of significant f is 0.00% change in MPS is caused by other external factors different then EPS.10% which indicates that the MPS of NB bank is most significantly affected by these factors during the study period.20% which indicates that the change in MPS of the SCB is due to the combined effect of EPS. 4. DPS and NWPS and 52. The calculated value of significant f (0. The regression model for HBL shows that EPS. DPS and NWPS of the company during the study period. The combined effect on MPS of EPS. Only 15. DPS and NWPS of SCB is 93.05.90% change in MPS is caused by other external factors. Similarly.328 which is greater than 0. DPS and NWPS of NB bank is 98.309 which is greater than 0. 5. The pricing behaviour of MPS of Everest Bank is significantly influenced by the combined effect of EPS.8% variation on MPS is caused due to the other factors than EPS. shows the calculated model of multiple regression is statistically insignificant at 5% level of significance. 3. DPS and NWPS significantly affected the MPS of HBL.10% which indicates that the change in MPS of the NABIL is due to the combined effect of EPS. The combined effect on MPS of EPS. But this relationship established by regression model is statistically insignificant at 5% level of significance as the value of significant f is 0. And only 6. The regression 0. And the regression model is statistically insignificant at 5% level of significance as the value of f is 0. the regression model is also statistically significant at 5% level of significance that the value of f is 0.10% variation is caused by other irrelevant factors.134. the calculation shows that EPS. The combined effect on MPS of EPS and NWPS of Peoples Finance Co. the fluctuation in the MPS of AFCL is less affected by the combined effect of EPS.90% and 1.80% change in MPS is caused by other external factors. DPS and NWPS and 88. the affect of DPS on MPS could not be calculated. DPS and NWPS of the banking companies only 39.7. is 46. Since. due to the model is statistically insignificant at 5% level of significance as the value of significant f is 0.05. The regression model is statistically insignificant at 5% level of significance that the value of f is 0. So. As per the result of whole banking sector. 8. Ltd. DPS and NWPS by 93. 97 . is due to the combined effect of EPS and NWPS and only 53. And the regression model is statically insignificant at 5 % level of significance. Similarly.10% and 6.538 which is greater than combined effect of EPS. in average 61. Different form the sample banking companies.00% variation in MPS is caused by other irrelevant factors.10% variation in MPS is caused by the other irrelevant factors. 11. DPS and NWPS by 98. Peoples Finance did not distribute any dividend during the study period.9% change in the MPS of the banking sector companies is due to the effect of the change in EPS.90% variation is caused by other irrelevant factors. 9.20% which indicates that the change in MPS of the Peoples Finance Co. 10.33. The change in MPS of UFL due to the combined effect of EPS. The change in MPS of Himalayan General Insurance Co. DPS and NWPS of banking sectors companies are more important in the formation of MPS than other factors. 9% due to the other factors.05. The regression model is statistically significant at 5% level of significance that the value of f is 0. DPS and NWPS. It shows that in average. the pricing behaviour of the sampled companies is significantly affected by EPS. DPS and NWPS and more which is 59. 98 . 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. Difference from the banking sector.1% affected by financial indicators like EPS. the change in MPS of the whole Finance Co. As per the result computed from the combined effect on MPS of EPS. the change in MPS of Insurance companies is due to the combined effect of EPS.7% change in MPS is due to the other factors than these financial indicators. sector is less which is 40. DPS and NWPS and only 19.12. So. 14. 15. which indicates that in average. This relationship model is also statistically significant at 5% level of significance. 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. 13. With respect to the calculation of actual rate of return and required rate of return.031 which is greater than 0.40% variation is caused by the other factors.3% and 39. 9 companies out of 10 have actual rate of return are more than required rate of return. DPS and NWPS as a whole Insurance sector is 80. 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. thus its stock price is found over priced.60%. But this result occurs due to the calculation of only five years data and drastically decreasing interest rate and risk free rate. DPS and NWPS by 60. The regression model is statistically insignificant at 5% level of significance. It shows that Nepalese investors are aware of the political and other environment of the country. The signaling and informational factors on the event of rupture of peace talk and re-start of war on Bhadra 10. 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. It seems that investors buy the stock only for dividend and they are not interested on speculative 99 . As the peaceful environment in a country play a catalyst role in the investing activity. It is find out from the T-test that the political event of Ashwin-18. 18. 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. 2059 as the alternative hypothesis accepted that null hypothesis rejected at 5% level of significance at 9 degree of freedom. 23. An evident find out from the study is that Nepalese stock market has the shortage of professional investors. It was found that the investors’ major motives for owning the shares of company are for better price appreciation and to receive the dividend. 20.16. 22. 2003 as the null hypothesis accepted at 5% level of significance at 9 degree freedom. the share price on NEPSE has been positively affected by the event of Ceasefire on Magh 15. 21. 17. 2059 has not significantly affected the stock price at NEPSE. 19. 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. 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. Major of the investors are not trading in secondary market and those who trade in secondary market. 28. So. 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. Similarly. Some investors are interested on the pricing behavior but they are not interested on trading of the shares in secondary markets. Nepalese security market has the shortage of professional investors. 26. purchase it due to the high rate of dividend. 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. 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. 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. 24. people are only investing in shares with the excess money they have over their expenditure.motive. As per the respondent major of the investor who purchases the shares from the secondary market. 27. 25. 100 . SUMMARY. NWPS.1 Summary Price of security is the outcomes of investor’s psychology.79 of NB bank and the least relationship of MPS with EPS is -0. For these purpose. NWPS and last year's dividend. But one must look into financial status of organization before making investments.29 of Everest Insurance Company. the most positive relationship of MPS with EPS is 0. Various statistical as well as financial tools were adopted as test methodology. Here in Nepalese market. EPS. If the organization is not financially strong then it is likely to loose one’s investment one day or other. the highest relationship is 0. in case of DPS. DPS. dividend and price appreciation of stock is major factors for the investors to decide about purchasing of shares. market rumors. 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. To find out the above stated objective financial as well as statistical tools have been used. Along with the DPS and price appreciation. CONCLUSION AND RECOMMENDATIONS This chapter presents the summary and conclusions drawn form the analysis of the study. NB bank's MPS has most positive relationship and the lowest 101 . Similarly.97 of NB bank and lowest relationship is -0. The study was conducted to find out the behavior of stock price with respect to the movement of various financial indicators. the study also tried to find out the investors’ response toward the change in the MPS of their stock. political and economic environment etcetera are the other factors to influence the buying and purchasing behavior of the investors. With regard to the NWPS. certain external events and other factors.22 of UFL. The psychology of investors is affected by various factors. CHAPTER – 6 6. Among the 10 selected companies. The first objective of the study is to find out the relationship of market price of share (MPS) with various financial indicators like EPS. Similarly. to find out the impact of the combined effect of EPS. Similarly the lowest co-efficient of determination (r2) is 46. the highest required rate of return is 31. DPS and NWPS among the all selected listed companies. From the comparison it has been found that actual rate of return is higher than the required rate of return of 9 selected 102 . the MPS of the companies are influenced by the combined effect of EPS. DPS and NWPS on MPS. Similarly. 53. Similarly. For this purpose r2 has been calculated which denotes the combined effect of EPS.36% of Himalayan Bank Ltd.9% which means the MPS of UFL is mostly influenced by the combined effect of EPS. Only 1. As per the presentation. To find out the pricing status of stocks. However. the trend is that the MPS of public quoted companies is above their book value. The next objective of the study is about the identification of the price of stock whether it is over priced.86% and the lowest is 19. Generally.3%. DPS and NWPS on MPS. the highest co-efficient of determination (r2) of UFL is 98.55 of SCB. under priced or equilibrium priced. in an efficient market MPS fully reflects all the historical information publicly available.56% of Everest Insurance and the lowest required rate of return is 10. DPS and NWPS and this relationship is also statistically significant at 5% level of significance.10% variation in MPS is due to the other extraneous factors. As per the calculation. The co-efficient of determination(r2) of whole selected companies which is 60. NB bank has highest return that is 61.relationship is -0.20 % of PFL which indicates that the MPS of the PFL is least influenced by combined effect of EPS. actual rate of return and required rate of return was compared. multiple regressions analysis has been conducted with help of SPSS software. The market value is determined by the supply and demand functions.89% of Himalayan Bank Ltd. DPS and NWPS among the all selected listed companies during the study period.80% variation in MPS of the Company is influenced by the other external factors. shows that in average. in case of actual rate of return. In average EPS is highly co-related with MPS and DPS is least correlated with MPS of selected companies. 2060 and the event of Nepal’s entry in WTO at Sep-11. most investors prefer to buy shares of those companies whose earning are very attractive and 103 . In general.companies out of 10. The decision for investment largely depends on the information about the performance of the company.45%) is less than the required rate of return (30. ceasefire on Magh-15. 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. most of the sampled companies’ share price become undervalued during the study period. 2059 and the event of five major political parties’ movement have influenced the NEPSE index.97%). 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. Rupture of peace talk and starting of re-war at Bhadra -10. It makes the actual rate of return of the sampled companies high and the required rate of return low. 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. Similarly. 2003 respectively. the remaining two null hypotheses were rejected. But it depends on the events occurred in the country. Similarly. 2059. To find out the signaling and informational effect on share price. Only one HGI company’s actual rate of return (29. 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. So. Signaling and informational factors also play the major role in the pricing of the security in secondary market. are under priced and the only Himalayan General Insurance Company’s stock price is found over priced during the study period. It shows that the two events. none of the sample companies’ stocks are found to be equilibrium priced. paired T-test was conducted to get the result of third objective of the study. It reveals that the stock price of 9 companies out of 10. However current year's dividend has minimum role in the fluctuation of the market price. economic growth. But as per the questionnaire analysis. most of the investors are not trading their shares in secondary market. 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. market condition and many other factors before actually making an investment. 6. Among the analyzed financial indicators EPS seems to be most closely related with the market price of share.dividend pay out ratio is high.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. However. But these indicators are not alone to influence the price of share and there are other external factors such as economic situation. 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. rational investor analyzes not only earnings but also various information regarding the companies’ management and their dividend policy. political situation and other major events occurred in the country are also responsible for the pricing behaviour of the stock of the sample companies. DPS and NWPS. Although they seek for their share price. 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. economic situation. 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 104 . 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. This shows that there lacks professionalism in Nepalese investors.3 Recommendations: The findings of the study may be an important information for those who concern. the following recommendations can be outlined for the concerned: 1. 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. Most of the stocks of banking and finance companies are undervalued in the stock market. investors are recommended to buy these undervalued stocks by selling other overvalued stocks. From the study it seems that Nepalese investors have limited knowledge about security market. It lacks of professional investors. 6. 2. So. So.of the price of the sampled companies which makes the actual rate of return high. Thus. As per the study. 3. with the stock market activities. 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. So. Similarly. investors are recommended for the detail study of the financial 105 . So. 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. directly of indirectly. the study also shows that the some major events occurred in the country also effect on the market price of share. investors are trading the stocks with-out proper analyzing of the financial indicators of these companies. the political. 4. 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