International Journal of Marketing, Financial Services & Management Research____________________ ISSN 2277- 3622

Vol.2, No. 9, September (2013)

Online available at www.indianresearchjournals.com

A STUDY ON RELATIONSHIP BETWEEN MARKET PRICE &

EARNINGS PER SHARE WITH REFERENCE TO SELECTED
COMPANIES
K.HEMADIVYA*; DR V RAMA DEVI**

*ASSISTANT PROFESSOR
KLU BUISNESS SCHOOL
KLUNIVERSITY

**ASSISTANT PROFESSOR
KLU BUISNESS SCHOOL
KLUNIVERSITY

ABSTRACT
The most basic factors that influence price of equity share are demand and supply factors. If
most of the people start buying then prices move up and if people start selling prices go
down. Government policies, firm’s and industry’s performance and potentials have effects on
demand behaviour of investors, both in the primary and secondary markets. The factors
affecting the price of an equity share can be viewed from the macro and micro economic
perspectives. Macro economic factors include politics, general economic conditions - i.e. how
the economy is performing, government regulations, etc. So, the Present study tries to find
out the relationship and the impact of EPS on Market price of selected companies.

Introduction: Equity is the residual claim or interest of the most junior class of investors in
assets, after all liabilities are paid. If liability exceeds assets, negative equity exists.
Shareholders equity or stockholders equity or shareholders’ funds or shareholders capital all
are one and the same. They all represent the remaining interest in assets of a company, spread
among individual shareholders of common or preferred stock. In Equity Market, there are
number of factors which influence the market price of a share. An analysis of which factors
will affect and to what extent they affect the market price helps an investor to make an
investment decision Knowledge of fundamental factors and their impact on equity share
prices is helpful to corporate, management, government and investors (Chandra, 1981).This
Study seeks to analyze the various dimensions in a quantitative framework in improving the
understanding of share prices and their determinants in broadening the base of share market,
which may assist in creating a better investment culture in the country.
Investment is a most important essential element for the growth of the country Investments
translates economy in to a robust economy. For an industry, this study helps to identify the
variables which contribute to its growth in comparison with other industries. From the
Investor perspective, the study helps the investor to know the factors to be considered while
making an investment decision. An understanding of determinants of share prices is useful in
the formulation of management policies relating to dividend payment, bonus declaration,
right issues, etc. Investors can also form better judgments and make intelligent and rational
investment decisions (Sachdeva, 1994, p.5).

The most basic factors that influence price of equity share are demand and
supply factors. If most of the people start buying then prices move up and if people start
selling prices go down. Government policies, firm’s and industry’s performance and
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Vol.2, No. 9, September (2013)
Online available at www.indianresearchjournals.com

potentials have effects on demand behavior of investors, both in the primary and secondary
markets. The factors affecting the price of an equity share can be viewed from the macro and
micro economic perspectives. Macro economic factors include politics, general economic
conditions - i.e. how the economy is performing, government regulations, etc. Then there
may be other factors like demand and supply conditions which can be influenced by the
performance of the company and, of course, the performance of the company vis-a-vis the
industry and the other players in the industry.
To the corporate management an understanding of the valuation mechanism in
stock market is essential for the sound financial management of the company. An
understanding of determinants of share prices is useful in the formulation of management
policies relating to dividend payment, bonus declaration, right issues, etc. Investors can also
form better judgments and make intelligent and rational investment decisions (Sachdeva,
1994, p.5).
Investment in equity share is one of the most liquid forms of investment.
Market price of the share is one the most important factor which affects investment decision
of investors. It is also suggested from the theories that market price of the share depends upon
many factors, such as earning per share, dividend per share, size of the firm etc.,. This is the
most frequent question that most stock/options traders may have in their minds. Stocks price
changes due to market forces, i.e. buying and selling of the available stocks in the market.
The following are the factors that affect or even predict the buying or selling of stock that
ultimately affects stock prices of companies.

Review of Literature:
Faris Nasif AL- Shubiri observed that the changes in the stock price also depend up on the
micro and macro economic factors .In his study, he conducted Simple and multiple regression
analysis and found out that there is a highly positive significant relationship between market
price of stock and net asset value per share.
Dr. Sanjeet Sharma in his study analysed that earning per share being the strongest
determinants of market price in a positive direction.. So, investors are suggested to take care
of earnings per share variable in to account before investing in a company.
Malakar, B. and Gupta, R., (2002) revealed that Earnings per share is found to be
significant determinant of share price by considering share price of eight major cement
companies in India for the period 1968 to 1988 and five variables, namely, the share price,
dividend per share, earnings per share, retained earnings, and sales proceeds.
Tuli, Nishi and Mittal, R.K. (2001) conducted a cross sectional analysis by taking in to
account earnings ratio of 105 companies for the period 1989-93and found earnings per share
were found to be significant in determining the share Price
Malhotra (1987) conducted a study on four industries, namely general engineering, cotton
textile, food products and paper covering a period of four years from 1982 to 1985 and found
that earnings per share had positive and significant influence on market price of equity share
Kumar and Hundal (1986) used the linear regression model and examined the impact of
earning per share on market price of share
BalKrishnan (1984) applied correlation and multiple linear regression techniques on 22 firms
for the year 1982-83. Out of five variables, earning per share remained insignificant
determinant of market price.

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International Journal of Marketing, Financial Services & Management Research____________________ ISSN 2277- 3622
Vol.2, No. 9, September (2013)
Online available at www.indianresearchjournals.com

Research design and Methodology

Objectives :
The main objective of the study is
1.To identify the relationship between market price and earnings Per share of selected
Companies.
2. To analyse the impact of Eps on market price of selected Companies.

Hypothesis of the Study:

1. H0 : Null Hypothesis-“ There is no significant relationship between Market Price and
Earnings Per Share of selected Companies.”
Ha: Alternate Hypothesis-“There is a significant relationship between Market Price and
Earnings Per Share of selected Companies.”
2. H0 : Null Hypothesis-“ There is no significant impact of Earnings Per Share on
Market Price of selected Companies.”
Ha: Alternate Hypothesis-“There is a significant impact of Earnings Per Share on Market
Price of selected Companies.”

Need of the study:

The main purpose of this study is to find relationship between Market Price and Earnings Per
Share and impact of EPS on market price of selected Companies. This study helps in
identifying the relationship between Market Price and Earnings per Share of selected
Companies which helps the analyst to make an appropriate investment decision.

Scope of the study:

The study is undertaken for three sectors namely Primary, Manufacturing and service sectors.
The companies that are selected in each sector are Tata Consultancy services, Bharat Heavy
electrical Limited and ONGC.

Research Design:
A research design is the specification of methods and procedures for acquiring the needed
information. Design to be adopted here is exploratory research. It basically seeks to extract
information about the influence and relationship between Market Price and earnings per share
of selected companies in three sectors.

Sample size: The sample selected for the study include companies that are selected in each
sector namely Tata Consultancy services, Bharat Heavy electrical Limited and ONGC.

Tools used in analysis: The present study attempts to study the relationship between Market
Price and earnings per share of selected companies in three sectors by using coefficient of
correlation and Analysis of Variance.

Correlation

Correlation Co-efficient Definition:

A measure of the strength of linear association between two variables. Correlation will
always between -1.0 and +1.0. If the correlation is positive, we have a positive relationship. If
it is negative, the relationship is negative.

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Vol.2, No. 9, September (2013)
Online available at www.indianresearchjournals.com

Correlation Co-efficient :
Correlation(r) =[ NΣXY - (ΣX)(ΣY) / Sqrt([NΣX2 - (ΣX)2][NΣY2 - (ΣY)2])]
where
N = Number of values or elements
X = First Score
Y = Second Score
ΣXY = Sum of the product of first and Second Scores
ΣX = Sum of First Scores
ΣY = Sum of Second Scores
ΣX2 = Sum of square First Scores
ΣY2 = Sum of square Second Scores

Regression
Regression analysis is a statistical tool for the investigation of relationships between
variables. Usually, the investigator seeks to ascertain the causal effect of one variable upon
another. To explore such issues, the investigator assembles data on the underlying variables
of interest and employs regression to estimate the quantitative effect of the causal variables
upon the variable that they influence. The investigator also typically assesses the “statistical
significance” of the estimated relationships, that is, the degree of confidence that the true
relationship is close to the estimated relationship.
Y = a + bX, where
X is the explanatory variable and Y is the dependent variable.
The slope of the line is b, and a is the intercept (the value of y when x = 0).

Data Analysis
Table 1.1 Correlation- BHEL

Market
Price EPS
EPS 1 .759**
Market Sig. (2-tailed) .004
Price N 12 12
EPS Pearson Correlation .759** 1
Sig. (2-tailed) .004
N 12 12
**. Correlation is significant at the 0.01 level (2-
tailed).

Table 1.2 Correlations-ONGC

Market
price EPS

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International Journal of Marketing, Financial Services & Management Research____________________ ISSN 2277- 3622
Vol.2, No. 9, September (2013)
Online available at www.indianresearchjournals.com

Market Pearson Correlation 1 .735**

Price Sig. (2-tailed) .007
N 12 12
EPS Pearson Correlation .735** 1
Sig. (2-tailed) .007
N 12 12
**. Correlation is significant at the 0.01 level (2-
tailed).

Table 1.3 Correlations-TCS

Correlations
Market
price EPS
Market Pearson Correlation 1 .280
price Sig. (2-tailed) .378
N 12 12
EPS Pearson Correlation .280 1
Sig. (2-tailed) .378
12

The above table 1.1 explains the relationship between market price and EPS of
BHEL(manufacturing sector).The correlation between market price and EPS of BHEL is
0.759 which indicates there is a high positive relation between market price and EPS of
BHEL and It is highly significant .
The above table 1.2 explains the relationship between market price and EPS of
ONGC(primary sector).The correlation between market price and EPS of ONGC is 0.735
which indicates there is a high positive relation between market price and EPS of ONGC and
It is highly significant
The above table 1.3 explains the relationship between market price and EPS of TCS(service
sector).The correlation between market price and EPS of TCS is 0.280 which indicates there
is a positive relation between market price and EPS of TCS and It is not significant

REGRESSION ANALYSIS
Table No. 4.1 ANALYSIS OF BHEL
The regression is analysed by taking in to account in to three components . They are Rsquare
, Significance of F, The regression equation
Y = a+bx

Summary out put of

BHEL
Regression Statistics
Multiple R 0.758888
R Square 0.575911

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Vol.2, No. 9, September (2013)
Online available at www.indianresearchjournals.com

Adjusted R Square 0.533502

Standard Error 309.3452
Observations 12
ANOVA
Significance
Df SS MS F F
Regression 1 1299526 1299526 13.57995 0.004210777
Residual 10 956944.8 95694.48
Total 11 2256471
Standard Upper Lower Upper
Coefficients Error t Stat P-value Lower 95% 95% 95.0% 95.0%
Intercept 494.4617 424.6024 1.164529 0.271239 -451.6113294 1440.535 -451.611 1440.535
Eps 20.69429 5.615669 3.685099 0.004211 8.181803946 33.20678 8.181804 33.20678

The above table specify the regression equation MP= 494.4617+20.69429EPS

The above table 4.1 show the out put of regression analysis for BHEL(manufacturing sector).
Regression analysis tries to find out the impact of EPS on market price with reference to
BHEL. In present analysis R2 is 0.57 which indicates if there is a 100 change in EPS there
will be 57% change in market price
The analysis shows that F is significant at 0.01 level. Hence null hypothesis is rejected . It
means that market price is significantly affected by changes in EPS with reference to BHEL.

Table No. 4.2 ANALYSIS OF ONGC

Regression Statistics
Multiple R 0.734584964
R Square 0.539615069
Adjusted R
Square 0.493576576
Standard Error 267.3760043
Observations 12

ANOVA
Df SS MS F Significance F
Regression 1 837930.169 837930.169 11.72095422 0.006508
Residual 10 714899.2766 71489.92766
Total 11 1552829.446

Upper
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0%
5.0%
Intercept 105.1964 253.8112 0.41446 0.68728 -460.3301 670.72312 -460.3301 670.723

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Online available at www.indianresearchjournals.com

EPS 12.51116 3.654402 3.42358 0.00650 4.368652 20.653684 4.36865 20.6536

The above table specify the regression equation MP= 105.19646+12.5111684EPS

The above table 4.2 show the output of regression analysis for ONGC(primary sector).
Regression analysis tries to find out the impact of EPS on market price with reference to
ONGC. In present analysis R2 is 0.49 which indicates if there is a 100 change in EPS there
will be 49% change in market price. The analysis shows that F is significant at 0.01 level.
Hence null hypothesis is rejected. It means that market price is significantly affected by
changes in EPS with reference to ONGC.

Table No . 4.3 ANALYSIS of TCS

Regression Statistics
Multiple R 0.280009729
R Square 0.078405448
Adjusted R -
Square 0.013754007
Standard Error 233.9974793
Observations 12
ANOVA
Df SS MS F Significance F
Regression 1 46583.13388 46583.13 0.850759 0.378054643
Residual 10 547548.2034 54754.82
Total 11 594131.3373

Coefficient Standard P- Lower Upper Lower Upper

s Error t Stat value 95% 95% 95.0% 95.0%
- -
Interc 277.2083 1.6546 0.1290 158.98468 1076.332 158.98468 1076.332
ept 458.674 465 18 04 42 684 42 684
- -
7.5257631 8.159196 0.9223 0.3780 10.654058 25.70558 10.654058 25.70558
Eps 31 134 66 55 7 496 7 496

The above table specify the regression equation MP= 458.674+7.525763131 EPS
The above table 4.3 show the output of regression analysis for TCS (service sector).
Regression analysis tries to find out the impact of EPS on market price with reference to
TCS. In present analysis R2 is 0.01 which indicates if there is a 100 change in EPS there will
be 10% change in market price.
The analysis shows that F is not Significant and hence null hypothesis is accepted. It means
that market price is not significantly affected by changes in EPS with reference to TCS.
CONCLUSION:
There are different factors affecting the market price of a share. Among them one of the
important factor taken in the study is Earnings per share Therefore, the present study
examines the relationship between market price & EPS.

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International Journal of Marketing, Financial Services & Management Research____________________ ISSN 2277- 3622
Vol.2, No. 9, September (2013)
Online available at www.indianresearchjournals.com

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Approach: The Modified Model”, Finance India, Vol.16, No.4, December 2002
pp.1409-1418
4. Tuli Nishi and Mittal, R.K., (2001), “Determinants of Price-Earnings Ratio , Finance
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5. Malhotra, V.J.(1987) “Determinants of Equity Prices in India”, Ph.D. Thesis,
Himachal University, Shimla
6. Balkrishan, (1984), “Determinants of Equity Prices in India”, Management
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7. Chandra, Parsanna,(1981), “Valuation of Equity Shares in India”, Sultan Chand and
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