FIRM SPECIFIC AND MACROECONOMIC DETERMINANTS OF COMMON STOCK PRICES: EVIDENCE FROM COMMERCIAL BANKS OF NEPAL

Abstract

This dissertation relates cross-sectional differences in stock prices of Nepalese commercial banks to the underlying behavior of six firm specific variables: earnings per share, book value per share, cash dividend per share, stock dividend per share, price earnings ratio, and firm size. It also examines the cointegrating relationship between stock prices and macroeconomic variables; namely gross domestic product, inflation, and interest rate. This study uses both primary and secondary sources of data. The balanced panel data from ten commercial banks including 150 observations are used for the period of 2000-2014. The earnings per share and stock dividend per share are the more significant determinants of stock prices of commercial banks in Nepal. The performance of the stock dividend is especially noteworthy; this variable is statistically and economically the most important of the six firm specific variables investigated. The result also shows the existence of cointegration between included macroeconomic variables and stock prices and therefore exhibits long-run equilibrium relationship in the context of Nepal. The findings have important implications to formulate the policy in managing stock market of Nepal and in other managerial decisions like making investment strategies, restructuring and development.