EFFECT OF SELECTED VARIABLES ON STOCK PRICE WITH REFERENCES TO

COLOMBO STOCK EXCHANGE SRI LANKA.

Introduction

A number of empirical studies have been undertaken by the different countries to identify the
factors that affect stock price. Past literature reveals that movements of stock price depend on
internal and external factors. Among the internal factors, firm specific factors such as dividend
per share (DPS), earnings per share (EPS) and price earnings ratio (PER) affect the determining
of stock price. The present study examined the effect of dividend per share, earnings per share
and price earnings ratio of stock price on a sample of thirty five companies listed in the Colombo
Stock Exchange (CSE) from 2010 to 2020. Using multiple regressions model we can find out the
results reveals that EPS, DPS, PER are positive or negative significant impact on the stock price
in the CSE.

Financial variables are the most important tools for assessing and analyzing the financial
performance of any firm. It helps to compare and analyze the firm’s overall financial health of an
organization based on the various financial ratios. The different stakeholders can use financial
ratios to get an insight into the firm’s stock price. Thus, historical data are used from financial
statements; financial ratios help in forecasting the firm’s future health. They also help to
compare and contrast the financial performance of firms among their competitors. The
researches exploring this relationship have led to limited success owing largely to the existence
of variability in the stock market. The variance in the volatility of these markets makes it
difficult to obtain a uniform measure. A volatile stock market makes it difficult for the
accounting and financial variables to accurately predict the stock price (Feris & Erin, 2018).

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1.1 Literature Review

There are a number of empirical studies to test the stock price reaction to information in the
developed markets these studies are few in number on the emerging markets especially in the
South Asian Region and whole over the world.

Dissa-Bandara and Samarakoon (2002) tested the market response information contents in
dividend announcement and found that the market reacted positively to the information but the
response took time. Furthermore, Dissa Bandara (2001) tested the market response to the
dividend announcement and found that the market responded positively to the announcement of
dividend increase and negatively to dividend decrease. Other empirical research done by Ramesh
and Nimalathasan (2011), Gunasekara (2004) on market reactions on bonus issue and results
reveal that the market reacts both negatively and positively to the issue of bonus.

Beaver, (1996) examined the financial ratios can predict the future uncertainty. He concluded
that if financial ratios can play a major part in predicting failure then it can also predict the stock
price patterns and trends. He suggested that not all ratios are good predictors of stock returns.
Liquid ratio and debt ratio is weak in terms of their predictive power.

Neupane Bashu Lecturer, Nepal Commerce Campus, T.U (2019), examined the Impact of
Selected Variables on Stock Price With reference to Nepalese Commercial Banks. He concluded
this research also throws light on the ratios can help to predict the stock return for the next year.
Results give a clear indication that the P/E Ratio and EPS have the positive impact on the stock
price in the NEPSE.

Lewellan (2004) concluded that the financial ratios are still considered a good indicator for
determining the company’s stock price in the future. The study extensively used earning per
share to dividend per share and price earnings ratio to predict stock price and concluded that
ratios are still useful in predicting stock price.

Kelly and McNamara (2008) examined the relationship between the performances of investment
in Australian common stock in the industrial sector and their Price earnings ratio. The findings
confirmed that the price earnings ratio has no effect in the Australian stock market.

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Velnampy.T & Pratheepkanth.P (2011),examined the Earning per share (EPS) and its impact on
Share price in Milanka Companies in Colombo Stock Exchange (CSE), Sri Lanka. He concluded
this provides evidence that the Milanka Companies consider the earning per share of other
companies, in order to keep the company image and customer satisfaction. External competitors
also should consider the specific firms’ EPS details to competing in the market effectively.

1.1.2 Theoretical Literature Review

* Stock Market Efficiency Theory.

Theoretical Framework

On the basis of literature review, the dependent variable may be market price per share (Stock
Price) and independent variables are Price-Earnings Ratio, Earning per Share, Dividend per
Share. The theoretical framework determines the dependent variable and independent variables.

Independent Variables Dependent Variable

Earnings per share

Price earnings ratio Stock price

Dividend per share

Hence, this has been used to analyze the independent variables as the predictor of the dependent
variable.

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1.3 Research Problem

How to effect of Selected Variables on Stock Price with References to Colombo Stock Exchange
Sri Lanka?

1What is the relationship between Earnings per Share and stock price of selected companies in
Colombo stock exchange?

2. What is the relationship between Dividend per Share and stock price of selected companies in
Colombo stock exchange?

3. What is the relationship between Price Earnings Ratio and stock price of selected companies
in Colombo stock exchange?

1.3 Objectives

The researcher expects to achieve the following objectives:

1) To examine the relationship between Earnings per Share (EPS) and the stock price.

2) To examine the relationship between Dividend per Share (DPS) and the stock price.

3) To examine the relationship between Price Earnings Ratio and the stock price.

4) To find the relationship among various factors related to study.

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1.4 Hypothesis

Researcher developed the following hypothesis based on the literature to achieve the stated
objectives of the study.

The first hypothesis has been set to test the first objective (Earning per Share).

H01: There is no significant relationship between EPS and the stock price.

H11: There is a significant relationship between EPS and the stock price.

The second hypothesis has been set to test the second objective (Dividend Per Share).

H02: There is no significant relationship between DPS and the stock price.

H12: There is significant relationship between DPS and the stock price.

The third hypothesis has been set to test the third objective (Price Earnings Ratio).

H03: There is no significant relationship between PER and the stock price.

H13: There is a significant relationship between PER and the stock price.

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1.5 Research Design and Methodology

For the purpose of this study, a sample of 35 companies listed throughout the study period (2010
to 2020) was randomly selected. The data have been collected from the annual reports of the
company and the data based on the Colombo Stock Exchange (CSE). The research follows the
quantitative research design. The descriptive statistics, correlation coefficient, and standard
multiple regression analysis are using to analyze the financial data and to draw the conclusion by
testing the hypothesis. This dissertation mainly based on secondary data collection method. And
these data will collect Colombo Stock Exchange data bank and Annual Reports Sri Lanka and
selected company’s annual reports.

P = β 0 + ꞵ 1 EPS+ ꞵ 2 DPS + ꞵ 3 PER +¿ ℮1

P = the variable which is being predicted the Dependent Variable

ESP, DPS, PER= the variable that is being used to predict The Independent variable

β 0= Intercept

ꞵ 1 , ꞵ 2 , ꞵ 3 = Coefficient of independent variables or slopes of independent variables ℮1 = the

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1.6. Chapter organization

First Chapter: Introduction

The introduction, which is the first chapter, begins with the background of the research, problem
of the study, question of the study, objectives of the study, significance of the study,
Methodology (In methodology has include, Research Approach, Population and Sampling,
Research Hypothesis, Methods of Data Collection, Analysis of Data), Scope and Limitation,
Structure of the final report.

Second Chapter: Literature Review

The second chapter provides Literature Review of an extensive literature study on independent
variables and relationship between dependent variable. This chapter describes concepts and
definitions, theoretical literature review and empirical literature review and chapter summary.

Third Chapter: Research Methodology

The third chapter provides the research methodology and it includes description of the research
design, sample, conceptual framework, data collection methods are included.

Fourth chapter: Results of the Research

The forth chapter includes data presentation, analysis and interpretation. Quantitative analysis
will be adopted for the study. These included descriptive statistical analyses regression analysis.

Fifth chapter: Conclusion

In chapter five, in the last chapter summarized the analysis and explains the limitations of the
study and the future research directions are given.