Impact of Financial Per for Mane on Share Prices

8/3/2019 Impact of Financial Per for Mane on Share Prices.

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IMPACT OF FINANCIAL PERFORMANCE ON THE SHARE PRICES PERSPECTIVE

FROM PAKISTAN TEXTILE SECTOR

Tayyaba Gul Akram

Ms. (finance)

IBA Punjab University Lahore

Dr. Ehsan Malik

Director, Institute of business Administration,(IBA)The University of Punjab, LahoreRana Shahid Imdad Akash

Ph.D (Finance Scholar), International Islamic University Islamabad

Email: [email protected]

Marriam Ghafoor

Ms. (finance)


Huma Iftikhar

Ms. (finance)


Abstract:

This paper is attempted to determine the impact of financial performance on share prices of the

company in textile sector of Pakistan. We examine the relevant financial determinants of the

companys financial data. . The methodology of the Research in this research took the form of

the secondary data that is the summary of finance (annual report). In this study, we examine 23

firms in the textile sectors listed at the Karachi Stock Exchange for the period 2004-2010 using

descriptive statistics. Six repressors i.e. EPS, returns on assets ,returns on equity, price earning

ratio, net profit margin debt to equity were employed to see the effect on share prices Technical

the analysis by using SPSS, the testing of the research hypothesis with the test t and the F test .

The conclusion that was received in this work is that the selected 6 financial independent

variables significant towards the price of the share in textile sector.

Keywords: share prices, financial performance


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1. Introduction:

Stock price maximization is the most widely accepted objective of listed firms worldwide. The

entire corporate decision-making framework revolves around this comprehensive framework.

The metrics of financial performance are important in the corporate and investors' decision-

making to the extent they influence the stock prices.

Accounting information from financial reports can describe firms condition. Two factors, affect

the financial reports the firms activities and accounting system adopted by the firms. There are

many researches in value of financial reports information (both annual and interim reports). In

predicting firms future financial performance some researches study accounting information,

such as earnings and growth while other researches assess the effect of accounting information

on share price.

Nowadays, a large amount of information is available for investment and research analysis.

Researchers and investors can easily get access to such valuable information through various

channels on the Internet. For example, a companys financial report, which provides accounting

items and financial ratios, is an important indicator of financial performance. More importantly,

within stock market research, it is believed that the information from quarterly reports and

annual reports can influence the price of a stock, especially for unforeseen earnings or

unforeseen loss surprises. The information is likely to be in different formats, which are

quantitative and qualitative data. In particular, a companys quarterly and annual reports are

good examples of documents that contain both quantitative and qualitative data. Financial reports

provide information that is important for the investor because these reports reflect the financial

performance of the companies. Financial performance is the measurement of the success from

business. The performance of the management and the operational activity that are good could

increase the net profit so as to make the price per the share become high. In investing their

capital, investors consider the companies which have good stable performance. So the demand

increases for the shares of that company, ultimately increasing the share prices.

The Pakistan textile industry contributes more than 60 percent to the countrys total exports that

sum around 5.2 billion US dollars. The industry contributes approximately 46 percent to the

total output produced in the country. In Asia, Pakistan is the 8th largest exporter of textile

products.The contribution of this industry to the total GDP is 8.5 percent. Moreover, it provides


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employment to 38 percent of the work force in the country, which amounts to a figure of15

million. So it is the most important sector for research purpose. There are many listed textile

companies on KSE.

2. Literature review:

Erni W., Prof. Suryadi H. S. SSi (2009) studied the analysis of financial performance andthe effect on share price on the company lq45 available in Indonesia stock exchange by

using the secondary data from the financial reports of the companies that were registered

to the Indonesian Stock Exchange in the period 2004 up to 2008. Conclusions obtained in

this paper that the financial performance of the eight independent variables are partially

an effect on stock prices of agricultural sector (PBV), mining (PBV & PER), basic

industry & chemical sector (ROA & PBV), various industry sectors (no), consumption

goods industry sector (PBV & EPS), the property sector (PBV), the infrastructure sector

(PBV & EPS), the financial sector (ROE & EPS), and the trade sector (no). As for the

effect of simultaneously, only the trade sector alone is no effect from 8 ratio used.

Michael A., Barry T., Mohammad S. (2010) studied the impact of the pursuit ofsustainability on the financial performance of the firm by taking the 20% of the 600

biggest North American companies in terms of sustainability driven companies in 57

different industry sectors. And the result show that the evidence from the sample suggests

That There Is No Statistically Significance Difference In The Mean Percent Change In

Stock price between the two groups. The sample evidence supports the theory that the

corporate sustainability label has no statistically significant impact on the financial

performance of firms.

HusamAldeen Al-Khadash, Mete F. (2006)studied the Impact of Strategic Initiatives inManagement Accounting on Corporate Financial Performance.The industrial companies

sector was selected and 56 companies wereinvestigated. The results shows that As

management accounting continues to evolve and become more involved in the strategic

management of the firm, it is important for management accountants to understand not

only how to account for strategic initiatives (e. g., tqm), but also how these initiatives

should be implemented and managed to achieve maximum benefit for the firm.


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James A.G., David T.W., Theodore S.,Shigeo A. (2002) studied that If AccountingEarnings or Free Cash Flows Provide a Better Estimate of Capital Gain Rates of Return

on Stocks by taking the sample size of the American companies ranged from 881 to 1034,

while the Japanese sample ranged from 166 to365.The study found strong support for

using the net earnings approach to explain the capital gain rates of return for both

American and Japanese companies during the period 1981-99 and 1986-99, respectively.

Additionally the study found strong support for the relationship between capital gain

returns and net cash flows associated with operations, interest and debt financing.

Sujata K. (2009) studied the impact of dividend policy on shareholders value of Indianfirms on three sectors IT, FMCG and Service sector. Data used was the dividend

announcement dates in each of the sector respectively from 2001 to 2008 comprising of

168 dividend announcements dates in IT sector and 199 and 202 dates in the FMCG and

service sector respectively. Estimation window of 150 days was chosen. It was concluded

that Factor of dividend signalling and ownership, liquidity ratios are significantly

negatively related with DP ratio. Also a positive significant relationship exists between

RE earnings and DP ratio. This shows that in IT sector capital gains are preferred are

cash dividends. The information environment is highly symmetrical. Therefore, cash

dividends are not used to signal their profitability to shareholdersthat thecapital gains are

preferred to cash dividends, and there is negative and significant relationship between DP

ratio and Factor of liquidity, firm size, growth & expansion.

Mehdi S.(2008)examined the impact of the introduction of Shariah-compliant Index (SI)by Bursa Malaysia on the performance and liquidity of included shares by using data of

daily stock prices, bid-ask spread and volume of trade for 188publicly traded companies

in our sample, which were collected from DataStream. The findings provide evidence of

significant negative abnormal returns from 15 days prior to the event to 15 days after the

event. Over longer periods cumulative abnormal returns become positive and increase

over time.

Kevin B.H. and Vinod R.S. (2003) studied the impact of business excellence on financialperformance. The data consisted of two phases, the post-implementation period the

implementation period using the sample consisted of 600 winner companies Stock market

portfolio. The results found in this study showed that When Business Excellence is


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implemented effectively, financial performance improves dramatically. Business

Excellence improves profitability, leads to higher growth, and improves efficiency.

Furthermore, they provide additional validity to the winners share price performance

shown.

Dwi M., Mulyono, Rahfiani K. (2009) studied to examine the value relevance ofaccounting information in explaining stock return. The study used profitability, liquidity,

leverage, market ratio, size and cash flow as proxies of accounting information. This

research used secondary data from financial statements. The samples of the study were

listed companies in manufacturing industries that actively trading between2003-2006 in

Indonesia Stock Market. Results show that financial ratios, firm size, and cash flow from

operating activities altogether affect market adjusted return and abnormal return. The

return variability is best explained by second quarter report. This research also exposes

that the movement of stock price is affected much by factors other than firms financial

performance.

Anthony J.T., Ming-ChihL.,Rung-Tai K.,Kuo-Tay C., (2010)proposed an effectiveclustering method, HRK (Hierarchical agglomerative and Recursive K-means clustering),

to predict the short-term stock price movements after the release of financial reports by

gathering financial reports and financial ratios from the EDGAR database, focusing on

the companies listed in the S&P 500 index as of Sep. 30, 2008, and collected all available

quarterly and annual reports released from Jan. 1, 1995 to Dec. 31, 2008.The

experimental results show that HRK outperforms SVM. Besides, the performance of

considering both qualitative and quantitative features in financial reports is better than

that of only considering the qualitative or quantitative features.

Porter and Ketels (2003) noted that there is little systematic evidence on the impact ofthe UK financial market on UK companies strategy and investment choices.Using the

secondary data of company accounts from Thomson Financial DataStream. data from

published accounts for an unbalanced panel of 850 companies whose shares are listed on

the London Stock Exchange, over the period 1990-2000.Results found in this research

work are that other investors have become much more active in monitoring management

and enforcing change through engagement. The analysis shows that R&D firms are more


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JSX only 13 acres Used as samples for this study. The result of this study using multiple

regressions that finds only two variables (return on assets and current ratio) that

significantly affect the Following year stock return with the level of significance 5

percent.

Jonathan Lewellen, studies whether financial ratios like dividend yield can predictaggregate stock returns. Predictive regressions are subject to small-sample biases, but the

correction used by prior studies can substantially understate forecasting power. I show

that dividend yield predicts market returns during the period 19462000, as well as in

various subsamples. Book to market and the earnings-price ratio predict returns during

the shorter sample 19632000. Initial tests produced strong evidence that market returns

are predictable, but subsequent research has argued that small-sample biases explain the

bulk of apparent predictability. The accumulated evidence suggests that DY; B=M; and

E=P have, at best, weak power to predict returns.

Hypothesis: According to present literature we can assume that:

y There is positive relationship between financial performance and share prices of 23selected textile companies listed in Karachi stock exchange.

y Profitability, earnings, returns of assets, business excellence financial ratios, firm size,and cash flow from operating activities altogether affects Share prices traded in stockexchange.

4. Descriptive Statistic:

To examine the relationship between variables statically behavior of data is examined by

employing Descriptive statistics. Descriptive statistics is performed to examine the data

distribution to account for Mean, Median, and Standard deviation, Minimum and Maximum

Range, Variance. It is helpful to establish an opinion about the behavior of time series.

Correlation analysis is needed to identify the correlation between dependent and independent

variables i.e., share prices, debt to equity, price earning ratio, earning per share, return on assets,

return on equity and net profit margin .However it is a weaker measure to identify the

relationship and not an absolute measure to proved cause and effect relationship.This study

makes use of linear regression analysis.


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Shareprices= o+1(EPS)+2(NPM)+3(ROA)+4(ROE)+5(P/E)+6(DtoE)+

Where

Share prices= Share prices

EPS = earning per share

NPM = net profit margin

ROA = return on assets

ROE= return on equity

P/E = price earning ratio

DtoE= debt to equity

=error term

Descriptive statistics for all variables is calculated and presented in Table 1, debt to equity, price

earning ratio, earning per share, return on assets, and return on equity and net profit margin the

summery of statistics of all this is given in table1.

Table 1.Descriptive Statistics (7-year summary).

Descriptive Statistics

N Minimum Maximum Mean Std. Deviation

SHAREPRICES 161 .00 966.17 59.6604 128.42727

EPS 161 -287.20 155.50 6.4953 34.93092

PEARNING 161 -639.60 393.86 5.6057 70.04495

NPM 161 -62.70 19.90 .2702 8.78492

ROA 161 -32.50 13.54 .6201 6.46755

ROE 161 -1281.40 255.60 -5.0125 105.81413

DtoE 160 .00 57226.00 6.1575E2 4508.84485

Valid N (list wise) 160


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5. Empirical Results:

The determinants of financial performance i.e. Debt to equity, price earning ratio, earning per

share, return on assets, return on equity and net profit margin effect on share prices was analyzed

through regression. The regression equation is used to test the selected variables. The results are

given in relevant tables.

Regression:

Table2. Regression Coefficients and Significance

Model

Un standardized Coefficients

Standardized

Coefficients

t Sig.B Std. Error Beta

1 (Constant) 58.543 10.965 5.339 .000

EPS .528 .328 .143 1.611 .109

PEARNING -.007 .147 -.004 -.045 .964

NPM .687 1.703 .047 .404 .687

ROA -1.288 2.614 -.065 -.493 .623

ROE -.095 .405 -.078 -.234 .815

DtoE -.003 .009 -.117 -.371 .711

a. Dependent Variable: SHAREPRICES

Interpretation of Regression:

As table shows r square is 0.02 f value is 0.06 with DF = 5 calculated as (c-1) and p value is =

0.688 which is greater than 0.05 which shows that the relationship is non significant so there is

no significant relationship between financial performance and share prices of the selected textile

companies. So findings stated that there exists a positive relationship.

The value of Predictors: (Constant), debt to equity, price earning ratio, earning per share, return

on assets, return on equity with co-efficient value with 0.140 which is greater than 0.05 which is


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non significant so there is relationship between predictors or independent variables and share

prices which is dependent variable.

Table2.1

. Regression Model Summary

Model R R Square Adjusted R Square

Std. Error of the

Estimate

1 .144a .021 -.018 129.95902

a. Predictors: (Constant), Dto E, PEARNING, EPS, NPM, ROA, ROE

ANOVAs

Model Sum of Squares df Mean Square F Sig.

1 Regression 51730.846 5 10346.169 .616 .688a

Residual 2586821.342 154 16797.541

Total 2638552.188 159

a. Predictors: (Constant), debt to equity, price earning ratio, earning per share, return

on assets, return on equity

b. Dependent Variable: SHAREPRICES

Interpretation of ANOVA:

AS ANOVA table shows that the Sum of square is = 25.34, Means square = 16.54, F value is

=0.616, P value is = 0.688, DF value is = 5 as the results shown p value is 0.688 and f value is

0.616 which is greater then 0.05so the relationship shows positive trends between DV&IV.


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Correlations

SHAREPRICES EPS PEARNING NPM ROA ROE DtoE

SHAREPRIC Pearson

Correlation1 .131

*.000 .057 .034 .037 -.037

Sig. (1-

tailed).049 .498 .237 .336 .320 .321

N 161 161 161 161 161 161 160

EPS Pearson

Correlation.131

*1 .016 .366

**.406

**.128 -.052

Sig. (1-

tailed).049 .420 .000 .000 .053 .257

N 161 161 161 161 161 161 160

PEARNING Pearson

Correlation.000 .016 1 .037 .006 .007 -.006

Sig. (1-

tailed).498 .420 .319 .471 .463 .470

N 161 161 161 161 161 161 160

NPM Pearson

Correlation.057 .366

**.037 1 .721

**.365

**-

.274**

Sig. (1-

tailed).237 .000 .319 .000 .000 .000

N 161 161 161 161 161 161 160

ROA Pearson

Correlation.034 .406

**.006 .721

**1 .497

**-

.383**

Sig. (1-

tailed).336 .000 .471 .000 .000 .000


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N 161 161 161 161 161 161 160

ROE Pearson

Correlation.037 .128 .007 .365

**.497

**1

-

.960**

Sig. (1-

tailed).320 .053 .463 .000 .000 .000

N 161 161 161 161 161 161 160

DtoE Pearson

Correlation-.037 -.052 -.006

-

.274**

-

.383**

-

.960**1

Sig. (1-

tailed).321 .257 .470 .000 .000 .000

N 160 160 160 160 160 160 160

*. Correlation is significant at the 0.05 level (1-tailed).

**. Correlation is significant at the 0.01 level (1-

tailed).

Interpretation of co-relation:

Co-relation shows positive relationship between DV &IV at 0.05 levels which is non significant.

Our empirical tests results provide. A positive relation is found between financial performance

and stock price.


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CONCLUSION:

The conclusion that was received in this research work is that our hypothesis proves significant

influence between DV &IVs.The evidence from the sample suggests that there is statistically

significance difference in the mean percent change in stock price. Debt to equity, price earning

ratio, earning per share, return on assets, return on equity and net profit margin activities

altogether affect the price of shares but stock price is affected by some other factors although

stock price is a good indicator of performance. Based on overall findings the model empirically

accepted & signifies the fact.


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References:

Erni, w., Analysis of financial performance and the effect on share price on the companylq45 available in exchange: Indonesia.

Michael, A. Barry, T. and Mohammad, S. ( 2010) , The impact of the pursuit ofsustainability on the financial performance of the firm, J. of Sustainability and Green

Business,

Husam, A., Mete, F.(2006),Impact of Strategic Initiatives in Management Accountingon Corporate Financial Performance Evidence from Amman Stock Exchange, Managing

Global Transitions, Vol. 4, pp.299312 .

James, A.G., David, T.W., Theodore, S. and Shigo, A.(2002), Do accounting earnings orfree cash flows provide a better estimate of capital gain rates of return on stocks?FMA

European Conference Copenhagen.

Sujata, K. (2009),Impact of dividend policy on Shareholders value: a study of indianFirms. JBS, JIIT:Jaypee Institute Of Information Technology.

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Review.

Anthony ,Ming-ChihL.,Rung-Tai K.,Kuo-Tay C., An effective clustering approach tostock market prediction, the National Science Council of Republic of China under Grant

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Impact of Financial Per for Mane on Share Prices