Relationships between company performance and stock price

In this chapter, the focal point of the treatment will be on those literature reappraisals which are relevant to this survey. There are some surveies which had been done in analyzing the relationship between the companies ‘ public presentation and their stock monetary value motion. Most of the surveies which had been carried out was one but non the merely of the ground that influence companies ‘ stocks monetary value motion.

2.1 General reappraisals on this survey

Levine and Zervos ( 1998 ) find that that the association is peculiarly strong for developing states and that assorted steps of stock market activity are positively correlated with steps of existent economic growing across states. Empirical grounds associating stock market development to economic growing has been inconclusive even though the balance of grounds is in favour of a positive relationship between stock markets and economic growing. Their consequences besides show that after commanding for initial conditions and economic and political factors, the steps of banking and stock market development are robustly correlated with current and future rates of economic growing and productiveness betterment.

Lam ont ( 1998 ) surveies the relationship between net incomes and expected returns. In his surveies, he finds that higher volatility of net incomes related to expected returns but is non noise. He besides reports that both net incomes and dividends have the ability to calculate returns. Besides, his surveies besides report that net incomes are correlated with concern conditions and these do it to incorporate information.

In Shiller ( 1984 ) , and Fama and French ( 1988 ) ‘s surveies, they use arrested developments of returns on the lagged dividends and net incomes output as their method of surveies. Their surveies consequences show that lagged dividends and net incomes output have explanatory power. Sivakumar and Waymire ( 1993 ) survey stock monetary value behaviour in dealingss to gaining studies by utilizing 51 NYSE houses as their range of survey. They find that the proclaimed net incomes are positively related to stock returns.

In Fama ( 1990 ) surveies, he finds that the variables proxying for corporate hard currency flows and investors ‘ price reduction rates can explicate two-thirds of the discrepancy of aggregative stocks monetary value alterations while Roll ( 1988 ) finds that less than 40 % of the discrepancy of monetary value alterations can be explained by the arrested developments when regresses single stock monetary value alterations on coincident intelligence events and.

Campbell and Ammer ( 1993 ) argue that the usage of coincident arrested developments to explicate plus monetary value variableness is appealing though this attack. The consequence show that macroeconomic intelligence variables affect plus monetary values while Lev ( 1989 ) survey consequence show that net incomes alterations are merely weakly related to contemporary stock returns when he conducts a reappraisal of several surveies on the information content of net incomes and studies. Moreovers, Jin and Li ( 2003 ) besides study the causes of high volatility and irrational monetary value motions in the Chinese stock market.Their surveies result place hapless revelation and inaccurate fiscal studies by the listed houses as some of the causes for high volatility.

` Su ( 2003 ) analyzes the dynamic behaviour of hazards and returns in the Chinese stock market in his surveies. He finds that some of the authorities policies in respects to the stock market cause to the market volatilities. He besides finds that returns are positively auto-correlated to greater extent in Chinese stock markets than in developed markets and the volatility of stock returns to be high in China relative to developed markets.

Kendall ( 1953 ) observes that stock monetary values seem to weave indiscriminately over clip. In his surveies, he test whether the past monetary value can utilize to foretell the future monetary value alteration. Besides, his surveies besides expand to include others prognostic variables such as fiscal variables. Fiscal variables that normally tested to foretell stock returns are the monetary value to net incomes ratio, dividend output, book-to market ratio, return on equity, and assorted steps of the involvement rate. However, the grounds are assorted. Although there are many empirical researches on the foretelling power of fiscal ratios on stock returns, most of the surveies are focus on the developed market like United States ( US ) stock market ; similar surveies on emerging market like Malaysia market are light.

Kendall ( 1953 ) observes that stock monetary values seem to roll indiscriminately over clip, and trial whether the past monetary value can utilize to foretell the future monetary value alteration. His surveies expand to include others prognostic variables such as fiscal variables. Fiscal variables that normally tested to foretell stock returns are the dividend output, monetary value to gaining ratio, book-to market ratio, return on equity, and assorted steps of the involvement rate. However, the grounds are assorted. Although there are many empirical researches on the foretelling power of fiscal ratios on stock returns, most of the surveies are focus on the developed market like United States ( US ) stock market ; similar surveies on emerging market like Malaysia market are light.

Apart from that, return on equity will be used as a one of the measuring for fiscal public presentation of a company as it is one of the most of import indexs of a house ‘s profitableness and possible growing. This is because it takes into consideration the three major fiscal constituents ; the net net income border, plus turnover and the equity multiplier. It measures direction efficiency and effectivity in supplying return on capital used in net income coevals.

Harmonizing to Thompson and Yeong, 2001, return on equity ( ROE ) is used to mensurate a house ‘s profitableness because ROE can suit the consequence of different accounting process across industries and companies of different sizes every bit good as to minimise the multi-linearity between house age, house size and profitableness in theoretical account edifice.

Changes in ROE, which represents the alteration in house profitableness, measures direction efficiency and effectivity in supplying return on capital used in net income coevals for the current twelvemonth against the twelvemonth earlier. It besides expresses the addition or lessening in return on capital contributed by the legal proprietors of the concern ( Pizzey, 1980 ) .

July 28, 2017