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Research Evidence on dependents to share price movement

Discuss About The Understanding The Level Of Share Price Particular Banks In Malaysia.

The chapter focuses on addressing different level of independent and dependent valuations, which is affecting share price valuation of Malaysian Banks. In addition, the identified dependants such as dividend pay-out ratio, dividend yield, earnings per share, price earnings ratio, size and financial progress is evaluated in understanding the level of impact it has on the share price valuation of the companies. The theoretical analysis is conducted to understand the impact it has on the performance of the organisation. The different level of ratios can be used in improving the profits from operations, while detecting the financial progress aimed by the company over time.

There are different researchers that is being conducted on the qualitative factors influencing share price of the banks listed in different countries, which might help in identifying the determinants that might affect the price movement of Malaysian Commercial Banks. Researchers conduct relevant qualitative factors of Amman stock exchange to detect the variables, which are influencing the share price of the banking companies. The research is conducted by Almumani indicated that dividend per share, earning per share, size, price earnings ratio, book value, dividend pay-out ratio and Market price are considered to be the major factors, which influence share price of banks (Almumani, 2014). Moreover, the correlation and linear multiple regression models directly indicated that the combine effect of different variables are directly dependent on the share price valuation of Companies. The positive correlation is also shown between the independent and dependent variables, which might have an impact on share price. Regression results directly indicate the determinants influencing valuation of a particular organisation in the eyes of investors.

Other research also conducted on Karachi Stock Exchange where 15 organizations were used to determine the dependent and independent variables of share price movement. The evaluation directly portrayed the results where dividend yield, asset growth, return on assets, and size of the organization was identified as the major factor for share price movement. Moreover, the regression analysis directly indicated that size of the organization had a positive relationship with the changes in share price of the organization, while the other variables have no significant association with share price movement. this directly indicated the level of significance that company size has on investors during the decision-making process (Ahmad & Ramzan, 2016).

Further evaluation on the stock exchange market relatively indicates that Net Asset Value per share, dividend percentage, and gross domestic product is influencing the share price valuation of particular Investments. However, there is negative relationship between inflation and lending interest rates with the market price of a particular stock, which indicates that declining the interest rates would eventually increase share price valuation of banks and vice versa. The information can be considered as one of the major determinants of commercial banks, as they are influenced by the interest rate and inflation in the economy. Moreover, empirical research also identifies relevant relationship between share price with book value per share, dividend per share, earning per share, price earnings ratio, dividend yield, dividend payout, size in terms of sale, and net worth. The results of the research directly revealed that only earning per share, dividend per share, and book value per share was able to influence the share price valuation of banks, while other component did not have adequate impact. This relatively indicated that Investors could utilize the information in detecting the share price valuation of particular organizations and maximize the returns from investment (AL- Shubiri, 2010).

Dividend Pay-out Ratio

Empirical researcher and other information directly indicate that organizations, which are providing regular dividend and has high dividend payout ratio is generating higher value over the period. On the other hand, the stocks that is not providing adequate returns to the investors is valued at lower levels. This directly indicates that Companies with higher dividend payout ratio, dividend yield, and P/E ratio is able to attract more investors, which increases demand for the stock and in turn pushes the share valuation of the organization. Therefore, it could be estimated that investors choose companies with higher dividend, which increases their share valuation during the first year (Narayan, Sharma & Thuraisamy, 2014).

Dividend Pay-out ratio = Total dividend for the period / Net income available to common stockholders

The above table relevantly represents the overall dividend pay-out ratio, which depicts the impact of dividend on share price valuation of the organisation. In addition, the dividend pay-out ratio comprises of the formulas where total dividend for the period is dividend by the net income available for common stock holders. This presents the overall dividend, which the company is willing to pay to the stockholders during the current financial year. The formula is used by the investors in understanding the level of income in dividend pay-out ratio, which the company has during the previous fiscal years. In this context, Farooq & Zaheer (2015) stated that investors by using the dividend pay-out ratio is able to understand the level of income, which the organisation is willing to distribute to their shareholders during the financial year.

The investors utilise the ratios in understanding the progress conducted in previous fiscal years, which might help in improving returns from investment. The total dividends paid by the company is relevantly calculated, which might help in understanding the progress made by the company. Furthermore, the progress made by the company might help in detecting their financial progress, which might improve the return from investment. Giordani et al., (2014) argued that investors without adequate measure are not able to understanding the level in which investment needs to be conducted in a particular stock. The research conducted on determinants of share price directly indicate that dividends play a major role in influencing the share price valuation of a particular organisation. Moreover, dividend influence investors during their investment decisions which relatively increases the share valuation of an organisation.

Dividend Yield = Annual Dividend / Current Stock Price

 From the calculation of dividend yield investors able to identify the annual dividend that is paid by the organisation in comparison to the current stock price. This directly indicates the company to detect the level of payments that is provided by the organisation to every investors regarding the current investments and their organisation. Dividend yield is relatively detected by dividing the annual dividend provided by the organisation to its current stock price. Detection of the current dividends provided by the organisation help in detecting the current fair valuation of the company, which could improve returns of the investors. The information provided from the dividend yield is relatively compared with previous fiscal years, which helps the investors to identify the level of returns that the organisation can provide over the period. The historical significance of the valuation is a relatively important for the investors, as it helps in detecting the trend of the organization over the period of time and it could project itself in future (Kanapickien? & Grundien?, 2015).

Dividend Yield

Dividends are considered to be one of the major factors in influences the share price of an organization, while relevant studies have shown that investors are keen on investing on companies having higher dividend yield. this directly indicates that the organization is willing to pay handsome rewards to its investors after accumulating adequate returns. Dividend yield is only an instrument for the investors to weigh the current progress of the organization, while making adequate decisions regarding the investments that needs to be conducted in the company. Laitinen, Lukason & Suvas (2014) stated that organization with continuous rise on their dividend payments are able to attract more investors into the vicinity, which directly increases their share price valuation. Moreover, dividend discount model and investment equations directly use the dividends provided by the organization to determine the future share price valuation of the organization. This relevantly helps the investors to develop the level of scrutiny that is needed to identify the investment opportunity and improve their investment capability.

Earnings Per Share = Net Profit After Tax / No of Shares Outstanding

The third determinant that could be considered as one of the major influences of share price is the earnings per share ratio, which allows investors to goes into the current valuation of the organisation. Earnings per share is relatively calculated by dividing the net profit after tax with the number of shares outstanding of an organisation. this is relatively helps in detecting the minimum level of EPS that could be provided to the investors after deducting all the relevant expenses and litigation. The overall value of earnings per share is derived to detect the level of share price, which an organisation should have over the period of time. In this context, Lakshan & Wijekoon (2017) mentioned that Earnings per share relatively reflects the overall earnings of the organisation during the fiscal year after computing the expenses. On the other hand, Lakshmi, Martin & Venkatesan (2016) argued that  earnings per share is not considered as the overall dividend that is paid by the organisation, wild actual dividend and EPS of the organisation is relatively different. This is only due to the decisions made by the management regarding the retention of profits to conduct future investments and minimise the overall dividend that could be paid to a particular investor.

Earnings per share is considered to be one of the major determinants, as it directly provides the investors with the amount of money that is generated by the organisation after conducting their operations during the fiscal year. Decline in EPS is relatively witnessed in two different forms, where the organisation incurred loss during the financial year or there is an issue conducted by the organisation during the fiscal year. Both the situation reduces the earnings per share of an organisation, which allows the investors to understand the level of returns that could be generated from a particular investment. Hence, the valuation of EPS is considered to be one of the significant determinants, which allows the investors to understand the level of Share price that the organisation could have in future. Li, Zhang, Zhang & Chen (2016) stated that earnings questions for the used by investors to determine the price on in ratio of a particular stock, which could help in detecting the current valuation of an organisation. This calculation influences the investors in making investment decisions and has impact on the share price of banks.

Price Earnings Per Share = Market Value Per Share / Earnings Per Share

Price earnings ratio can be considered in the as one of the significant determinants used by investors to detect the level of investment opportunity in banking stocks. The calculation allows the investors to understand the current valuation of the stock and whether it is overvalued or undervalued. This detection directly helps in minimising the level of risk that could be conducted through the investment intended by the investors. The calculation relatively divides the market value for share of the organisation with its earnings per share and detect the level of price earnings per share of the company. Smaller the price earnings ratio for share of the organisation higher the chance of its increment in near future, which is considered to be an investment opportunity. the concept of the calculation is a relatively simple, which identifies the investment opportunity by comparing market value of the shared with earnings per share. Lukason, Laitinen & Suvas (2015) stated that price earnings ratio is considered to be the basic valuation method used by investors to understand the current status for particular stock and detect whether it is overpriced under-priced. However, Mihailovi? (2016) argued that due to the complex valuation system the simple method of price earnings ratio does not allow the investors to understand the actual valuation of a stock.

However, the significance of price earnings ratio is a relatively high, as it allows the investors to understand the current and basic valuation of an organisation. Therefore, it could be considered as an adequate determinant, which is affecting the share price valuation of banks over the period of time. positive changes in price earnings ratio is when it increases in value over time, as it depicts the investment opportunity to the investors.  however exponential growth or decline in the price earnings ratio directly indicates the instability in share price valuation of the company. This measure relatively nullifies the significance of price earnings ratio, which is used by investors in making adequate investment decisions.

Size of the organisation is also considered an adequate measure, as it improves the detection level of the investors in identifying investment opportunities in stocks. Investors are keen on investing in companies that are relatively larger in size as compared to small scale organisations. the large-scale organisations are relatively considered to have a high market capitalisation in comparison to small market capitalisation companies. The investors relatively rely on size of the organisation as it is considered to be risk cushion which safeguard the investment of the investor. Companies with higher market capitalisation has more demand among investors, which increases their valuation and influences their share price movement. on the other hand, companies with low market capitalisation, are relatively ignored by investors as they have low liquidity and chance of share transfer blockage due to low buyers. Olson & Zoubi (2017) mentioned that organisations with higher market capitalisation have more liquidity in the share trading, as maximum of the investors are invested in the particular stock. However, companies with low market capitalisation have low price volatility and volume, making it tough for the investors to conduct short term and medium-term Investments.

The financial progress instrument is relatively used by investors to identify the valuation of the organisation and understand the progress it made over the period of time. The financial progress is relatively evaluated with the help of different ratios suggest profitability, liquidity, efficiency, and solvency. The relevant calculations and information regarding the ratios are depicted as follows.

Profitability ratio:

Gross profit = Gross Profit / Revenue

Net profit = Net Profit / Revenue

The above table includes the calculation of profitability ratios such as gross profit and net profit, which is used to detect the financial stability of the organisation. The calculation of gross profit margin relatively comprises of the gross profit, which is divided by the revenue generated by the organisation. Similarly, the net profit margin calculation divides the current net profit of the organisation with its revenue. This type of calculation is a relatively conducted to detect the overall trend of a particular organisation and understand its financial progress. Moreover, the profitability calculation relatively sheds light on the future progress of the organisation and influences the share valuation of the organisation. Paul & Mitra (2017) stated that with the use of profitability ratio investors are able to understand the expenses conducted on administrative operations and the level of progress the organisation is making from previous fiscal years. However, the results provided by the profitability ratio only portrays the financial progress of the organisation, which relatively influences the investors in making relevant investment decisions, while the calculation does not help in portraying the actual valuation.

Liquidity Ratio:

Current Ratio = Current Assets / Current Liabilities

Quick Ratio = (Current Assets - Inventory) / Current Liabilities

The financial progress can also be evaluated with the help of liquidity ratio, which comprises of current ratio and quick ratio that identifies the financial stability of the organisation. The calculation of current ratio relatively comprises of current assets and current liabilities, which are divided to detect the level of assets maintained by the company to support its short-term obligations. Moreover, the quick ratio is relatively a smoke comprised and filtered calculation where the inventory is being subtracted from current assets and then divided by the current liabilities, which helps in understanding the actual financial condition of a particular organisation. The calculation of liquidity ratio indicates the level of progress that an organisation is making to support its short-term obligation while continuing its operations during turmoil times. The current ratio needs to be at the levels of two while the quick ratio needs to be other levels of 1, which directly indicates that the company has adequate current assets to support its short-term application and continue its operations during the fiscal year. According to Pech, Noguera & White (2015), liquidity ratio allows investors to understand the capability of the organisation to adequately function during turmoil times and continue its operation during the fiscal year.

Efficiency ratio:

Total Asset Turnover = Net Sales / Average Total Assets

Inventory Turnover = Average Inventory / Revenue

Efficiency ratio components are conducted in the above table, which relatively helps in understanding the level of efficiency of the organisation. The total asset turnover ratio and inventory turnover ratio is relatively calculated for detecting the efficiency of the management in making adequate decisions. The total asset turnover ratio is relatively detected after dividing the net sales of the organisation with its average total assets. On the other hand, the inventory turnover ratio is detected by dividing the average inventory with the total revenues of the organisation.  The calculation relatively indicates the efficiency of the management in making relevant decisions for improving the revenue and profit of the organisation. Phan, Sharma & Narayan (2016) argued that with the efficiency ratio investors are only able to gauge into the decisions made by the management in improving efficiency of the organisation, while it does not help in detecting its future progress and valuation. Therefore, it could be understood that efficiency ratio allows the investors to understand the management function of the organisation, which is an essential part in making the investment decisions. Hence, increment in share demand would eventually alter share valuation of the organisation.

Solvency Ratio:

Debt Equity Ratio = Total Liabilities / Shareholder’s Equity

Debt Ratio = Total Debt / Total Assets

The solvency ratio is considered to be one of the major indicators of investors, which influence the share price valuation of the organisation. Solvency ratio relatively consist of debt to equity ratio and debt ratio, which states the current financial progress and stability of the organisation. The debt equity ratio relatively devised the total liabilities with shareholders equity to determine the level of debt present within the liabilities of the organisation. Moreover, the debt ratio calculation consists of total depth which is divided by total assets to understand the level of debt used in purchasing effects of the organisation. This combination mainly helps in understanding the level of solvency, which an organisation faces. The solvency position of the organisation a relatively influences the share price, as investors are willing to pay lower for high solvency positions and vice versa. the solvency position of the banks is relatively calculated to understand their current financial progress and position, which directly influences their share valuation that is conducted by investors. Banks with highest chance of insolvency would be ignored by the investors, which directly affects their share valuation. Sharma, Pinto & Kumagai (2018) stated that during the financial crisis Lehman Brothers one of the prominent financial institution was bankrupt, as they cross the insolvency condition.

The evaluation of different research papers indicated that inflation and interest rates have negative impact on the overall share price valuation of banks. The changes in interest rates and inflation directly have impact on operations of the bank, as they operate in both terminology. the rising interest rates would eventually reduce the business of the banks and declined its overall profit during the fiscal year, which would eventually hamper their share price valuation. On the contrary, if the interest rates are reduced more loans and advances will be conducted by the bank, while improving its profits during the fiscal year. Hence, it could be identified banks have an inverse relationship with the inflation and interest rates, which directly affects their revenue and share valuation stream. Soares & Pina (2017) mentioned that Rising inflation rate directly reduces the value of loans that is provided by the bank to a particular lender, which in turn reduces the significance of instalments conducted by the borrower.

Figure 2.1: Conceptual framework with Dependent and Independent Variables

(Source: As Created by the Author)

Conclusion:

From the valuation it could be identified that the independent variables such as dividend pay-out ratio, dividend yield, earnings per share, price earnings ratio, size of the organisation, financial progress, inflation, and interest rate is directly influencing the dependent variable, which is market price of the share. the components of the independent variables relatively influence the investors regarding the current financial progress and position of the banking companies, which is used as an indicator to conduct adequate Investments. Therefore, it could be understood that with the above identified determinants the share price of the banks in Malaysia influenced.

References

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