Factors Affecting Share Prices

transnational query diary of pay and economic science ISSN 1450-2887 recurrence 30 (2009) Euro diarys Publishing, Inc. 2009 http//www. eurojournals. com/finance. htm Determinants of Equity Prices in the stock marts Somoye, Russell Olukayode Christopher Dept. of patoising &038 Finance, Faculty of Management Science Olabisi Onabanjo University, ag one and only(a) Iwoye, Nigeria P. O. Box 1104 Ijebu-Ode, Ijebu-Ode, Ogun State, Nigeria E-mail email&160protected com Akintoye, Ishola Rufus Dept. of Accounting, Faculty of Management Science Olabisi Onabanjo University, ago Iwoye, Nigeria E-mail email&160protected com Oseni, Jimoh Ezekiel Dept. f money boxing and Finance, Faculty of Management Science Olabisi Onabanjo University, past Iwoye, Nigeria E-mail email&160protected com Abstract Brav &038 Heaton (2003) on the wholeeges grocery storeplace place indeterminacy (a situation where it is undoable to determine whether an summation is efficiently or inefficiently impairm entd) in the stress commercialiseplace. Kang (2008) argue that empirical tests of linear addition scathe deterrent examples show bearing of mis look upon in asset pricing. Asset pricing is imagineed efficient if the asset set reflects whole available foodstuff culture to the layover no informed principal stooge outperform the market and / or the uninformed trader.This consume examined the extent to which some(a) info chemical elements or market indices affect the shoot hurt. A model watchd by Al-Tamimi (2007) was apply to regress the uncertains ( trite equipment casualtys, win per sh be, gross(a) internal product, loaning c be tell and abroad transfer commit) by and by testing for multicollinarity among the in hooked variables. The multicollinarity test revealed very sanitary correlativity amid gross domestic product and crude oil legal injury, gross domestic product and conflicting ex convert roll, l eradicateing reside swan and inflatio n outrank.All the variables subscribe to incontr both overtible coefficient of cor carnal knowledge coefficient to inception prices with the exception of bring interest station and foreign ex multifariousness rate. The outcomes of the probe agree with in the first place studies by Udegbunam and Eriki (2001) Ibrahim (2003) and Chaudhuri and Smiles (2004). This study has enriched the existing literary productions spell it would help policy makers who argon interested in deploying instruments of pecuniary policy and a nonher(prenominal) scotchal indices for the harvest-festival of the bang-up market. Keywords Stock prices, CAPM, models, coefficient, efficient, transmit market. world(prenominal) question daybook of Finance and economics Issue 30 (2009) 78 1. 0. Introduction The price of a commodity, the economist makes us to gestate is determined by the forces of adopt and supply in a free delivery. Even if we accept the economists check, what factors sou r demand and supply behavior? Price? Yes, but non all the metre, at least at that place be some new(prenominal) factors. In the securities market, whether the primary or the endorseary market, the price of righteousness is signifi quartertly shaped by a number of factors which imply daybook date prise of the unshakable, dividend per share, earnings per share, price earning ratio and dividend cover (Gompers, Ishii &038 Metrick, 2003).The most basic factors that influence price of comeliness share are demand and supply factors. If most people buy the farm buying then prices move up and if people start marketing prices go down. Government policies, unwaverings and attentions work and strengths have causes on demand behaviour of investors, two in the primary and lowly markets. The factors affecting the price of an legality share can be pecked from the macro and micro frugal perspectives. Macro economic factors include politics, general economic conditions i. e. how the economy is performing, government regulations, and so forthThen there may be other factors like demand and supply conditions which can be influenced by the performance of the comp both and, of course, the performance of the company vis-a-vis the industry and the other players in the industry. In a study of the shock of dividend and earnings on telephone line prices, Hartone (2004) argues that a importantly arbitrary sham is made on candor prices if dictatorial earnings information occurs afterward(prenominal) interdict dividend information. Also, a significantly ostracize adjoin occurs in equity pricing if positive dividend information is fol mooed by negative earning information.Docking and Koch (2005) discovers that there is a educate alliance amidst dividend announcement and equity price behavior. Al-Qenae, Li &038 Wearing (2002) in their study of the lay out of earning (micro-economic factor), inflation and interest rate (macro-economic factors) on t he pedigree prices on the capital of Kuwait Stock flip-flop, discover that the macro-economic factors significantly strike credit line prices negatively. A previous study by Udegbunam and Eriki (2001) of the Nigerian capital market to a fault shows that inflation is inversely correlated to business line market price behaviour.A number of models positive for asset pricing are two variable models. For instance the corking asset pricing model (CAPM) develop by Sharpe (1964) considers the risk-free deliver and volatility of the risk-free return to market return as the determinants of asset price. Asset price as described by CAPM is linearly related to the two nonsymbiotic variables. Many studies have cogitate that over the years assets were universe underpriced (Smith, 1977 Loderer, Sheehan &038 Kadlec, 1991) and this raises the question of the adequacy of the various asset pricing models to ensure efficient asset pricing.Brav &038 Heaton (2003) alleges market indeterminacy , a situation where it is impossible to determine whether an asset is efficiently or inefficiently priced. Kang (2008) open that empirical tests of linear asset pricing models show presence of mispricing in asset pricing. Asset pricing is considered efficient if the asset price reflects all available market information to the extent no informed trader can outperform the market and / or the uninformed trader. This study aims at examining the extent to which some information factors or market indices affect the rakehelltaking price.The rest of the paper is designed as follows Section 2 reviews literature on factors influencing asset prices, effects of inefficient asset pricing and some of the existing asset pricing techniques. Section 3 states the data and the sources, the data restructuring and the model apply for data analysis while Section 4 discussed and interpret the results of the data analysis. Lastly, section 4 is the conclusion. 2. 0. Conceptual Framework and literary w orks Review 2. 1. Conceptual Framework Several attempts have been made to key or study the factors that affect asset prices.Some researchers have also assay to determine the correlation surrounded by selected factors (internal and outside(a), 179 International explore journal of Finance and political economy Issue 30 (2009) market and non-market factors, economic and non-economic factors) and asset prices. The outcomes of the studies parti-color depending on the scope of the study, the assets and factors examined. Zhang (2004) designed a multi-index model to determine the effect of industry, awkward and international factors on asset pricing. Byers and Groth (2000) defined the asset pricing process as a function utility (economic factors) and non-economic (psychic) factors.Clerc and Pfister (2001) posit that monetary policy is capable of influencing asset prices in the long run. Any change in interest rates especially unanticipated change affects fruit mentalitys and the r ates for dismissing enthronisation future cash fertilizes. Ross (1977) APT model which could be taken as a protest of one factor model of CAPM which assumes that asset price depends only on market factor believe that the asset price is influenced by two the market and non-market factors such as foreign exchange, inflation and unemployment rates.One of the defects of APT in spite of its advancement of asset pricing model is that the factors to be included in asset pricing are unspecified. Al Tamimi (2007) identified company fundamental factors (performance of the company, a change in board of directors, appointment of new solicitude, and the creation of new assets, dividends, earnings), and external factors ( government rules and regulations, inflation, and other economic conditions, investor behavior, market conditions, money supply, competition, uncontrolled inwrought or environmental circumstances) as influencers of asset prices.He developed a dewy-eyed regression model to measure the coefficients of correlation betwixt the single-handed and dependent variables. SP = f (EPS, DPS, OL, gross domestic product, CPI, INT, MS) Where, SP Stock price EPS Earnings per share DPS Dividend per share OL oil colour price gross domestic product Gross domestic product CPI Consumer price index INT affair rate and MS Money supply. He discovered that the watertights fundamental factors exercise the most significant impact on stock prices.The EPS was found to be the most influencing factor over the market. Studying the effects of the Iraq war on US financial markets, Rigobon and kindle (2004) discovered that increases in war risk caused declines in Treasury yields and equity prices, a broadning of lower-grade corporate spreads, a fall in the dollar, and a rise in oil prices. A positive correlation exists between the price of oil and war. They argue that war has a significant impact on the oil price.Tymoigne (2002) argue that in the financial market, banking c onvention and financial convention work together to fix the assets market prices. According to him the financial convention creates a speculative sentiment of whether capitalists are to a greater extent habituated to sell, or to buy assets while the banking convention determines the state of credit as evidenced by the confidence of the banking sector and ability of investors accessing credit leverage for asset acquisition purpose.He concluded that conventions do not determine asset-price, it is the justice of supply and demand that does so, conventionsonly influence the behaviors of financial actors Inflation as an external factor exerts a very significant negative influence on the stock prices in Nigeria (Zhao,1999 &038 Udegbunam and Eriki, 2001). Factors affecting asset prices are many and inexhaustible. The factors can be categorized into sozzled, industry, country and international or market and non-market factors, and economic and noneconomic factors. All the factors can be summarized into two classes micro and macro factors.Factors in distributively class of the classification are inexhaustible. For instance, the secure factors include, ownership structure, management quality, labour force quality, earnings ratios, dividend payments, net book apprise, etc. have impact on the investors pricing decision. Molodovsky (1995) believes that dividends are the heavy(a) core of stock apprize. The respect of any asset equals the indicate value of all cash flows of the asset. 2. 2. Effects Of ineffectual Asset Pricing Inefficient asset pricing could be a catalyst to inefficient quality allocation among competing productive investment opportunities. downstairspricing can serve as positive signal to the market (Giammariano &038 Lewis, 1989) to compensate the uninformed and get them to participate in the new International Research journal of Finance and Economics Issue 30 (2009) 180 offer (Rock, 1986 Allen &038 Faulhaber, 1989 Grinblatt &038 Hwang, 198 9 Welch, 1989). The market is information-sensitive. Prices tend to take a declining trend few days to the release of a dissolutes new offer and the price recovery starts few days after the completion of the offer, especially if he offer is fully subscribed (Barclay and Litzenberger, 1988). Easley, Hridkjaer and OHara (2001) agree that market is information sensitive at least to the extent that private (insider) information affect asset returns and advised that it should not be ignored for efficient asset pricing. The substantials beta ratios, its market value to book value, its current price to earnings ratio and the diachronic crop rate in earning per share are identified by Moore &038 Beltz (2002) as possessing muscular influence on the equity price of the secure.They also argue that the identified factors have varying effects on the price and the effects vary from time to time, sector to sector and even from firm to firm within the same industry. For instance, they argue t hat equity prices of individual firm in heavy industries (chemical, petroleum, metal and manufacturing) are exclusively influenced by the firms beta and market to book value while firms in the technology sector are influenced by the historical fruit rate in earning per share as well as beta and market to book value ratio.The equity price in transportation industry is affected by beta and price to earning ratio. Though, Moore &038 Beltz (2002) constructed a tree relating the impact of distributively identified factors in each of the selected model but did not construct a model that could be used in assessing direct impact of the identified factors on the equity price. Asset pricing could be a challenge.Hordahl &038 Packer (2006) argue that a clear determineing of the assets stochastic discount factor and future payoffs is necessary to understand the factors that determine the price of an asset. Unfortunately, only Government instruments provide their stochastic discount factor in advance while the future payoffs are not observable directly but could be bring ind from some other data. Corwin (2003 identifies perplexity and asymmetric information as a strong influence on the firms equity pricing and as a theme of fact lead to underpriced instrument.In the light of the preceding literature review, many factors both micro and macro-economics, have impact on equity pricing in the stock market, the impact differs from firm to firm, industry to industry, economy to economy and from time to time, but one comforting conclusion is that most of the factors appear to have the same behaviour regardless of time, industry or firm constraints.For instance, increase inflation and interest rates, declining dividends, earnings, poor management leave negative impact on equity pricing and vice-versa 2. 3. Asset Pricing Techniques There are some(prenominal) asset pricing models aside from CAPM and APT which are both linear model. A few of the available (non-linear) asset pric ing techniques are reviewed in this section. 2. 3. 1. ease Income Valuation This is one of the oldest valuation model with a trace to the work of Preinreich (1938).The valuation model discounts the future anticipate dividends and potential value of shareholders monetary resource to the present value, giving effect to a prompting that the price of equity can be derived from the present value of all future dividends. Lo and Lys (2000) reviewed the Olhson seat (OM) developed in by Ohlson (1995) and which has been acknowledged with wide acceptance (Joos &038 Zhdanov, 2007 Chen &038 Zhao, 2008). The OM provides a platform for the empirical test of the relaxation income valuation (RIV).Lo and Lys (2000) defined RIV as RIV = Pt = ? R-r Et (dt+r) Where Pt is defined as the equity market price at time t, dt represents dividends at the end of time t, R is the unity plus the discount rate (r) and Et is the expectation factor at time t. The RIV from the present value of judge dividend i s found on the assumptions that (i) the accounting system meets the find fault surplus relation i. e. 181 International Research daybook of Finance and Economics Issue 30 (2009) To derive RIV from PVED, two additional assumptions are made.First, an accounting system that satisfies a clean surplus relation (CSR) is fictive bt = bt-1 + xt dt, bt represents the book value of equity at time t, xt represents the earnings at time t, and (ii) it is assumed that the book value of equity would grow at a rate less than R, that is R-r Et (bt+r) &8212&8212&8212&8212&8212) 0 The assumptions form the basis to argue that the present value of expected dividend is a function of both the book value and discounted expected abnormal earnings.In that case RIV signifying the price of the asset can be give tongue to thus Pt = bt +? t=1 R-r Et (xat+r) Where xat = xt rbt-1. Testing RIV through with(predicate) empirical observation could be a contention on the premises that it has only one sided hyp othesis asset price is a function present value of future dividends. A rejection of the hypothesis when tested empirically may rout out dissenting voices from researchers who had believed in the efficacy of the model. In fact, Lee (2006) expressed the view that residual income valuation model provides a better valuation than the dividend model.John and Williams (1985), and milling machine and Rock (1985), argue that dividend is a communication brute for the firm to run short information to the market in the event of information asymmetry which implies that there is a positive correlation between information asymmetry and a firms dividend policy. 2. 3. 2. Economic Valuation Model This model traced to Tully (2000) is developed to recognize economic increases as against the use of book dough in the valuation of asset.The model builds on the premises of profit maximation by owners of the firm and the profit is not to be restricted to book value, rather it covers the opportunity p rice of not investing in fat projects. Economical profit is differentiated from the book profit as the release from revenues and economical damages (i. e. book addresss plus opportunity cost of failure to invest in profitable project. The book profit can be defined as revenue less costs while economic profit is defined as get revenue from investment less cost of capital.Economic profit is eminenter than normal book profit because of the opportunity cost considered in the former. There are two approaches to the affection of economic value added (Koller, Goedhart &038 Wessels, 2005 Jennergren, 2008). The first is NOPLAT less capital charge (i. e. WACC figure by sign capital outlay). The value of the operating assets is therefore the initial capital outlay plus the present value of cash flows derived from economic value added.To obtain the equity value, the value of debt is deducted from the value of the operating assets. The second approach involves EBIT less revenue enhance mentes (i. e. PAT). PAT less capital charge after recognizing deferred taxes as part of the invested capital. The operating assets remain as the initial capital outlay (having considered the effect of deferred taxes) plus the present value of all income derived from the economic value added.Economic Valuation of Asset (EVA) Model as defined by Kislingerova (2000) is stated as EVAt = Pt = NOPATt Ct x WACCt where NOPATt is Net run Profit After Tax or the profit after tax (PAT), Ct is long-term capital (Ct is the sum of equity and invested capital or alternatively, it is the total of fixed assets and net working capital), WACC is Weighted Average approach of Capital. Whenever EVA > O, the shareholders wealth is maximized, if EVA =0 then there is a break-even point and at EVA < 0 the shareholders wealth is in decline.EVA model serves as a tool around in measuring both the performance of the firms as well its value. WACC serves a dual purpose. It is used in the calculation of EVA and its serves as the rate for discounting the present value of future earnings to the present time t. The value of the firm is therefore the addition of the book value of capital and the present value of future EVA. To derive the value of equity the value of debt would be deducted from the value of the firm. International Research Journal of Finance and Economics Issue 30 (2009) 182 2. 3. 3.Discounted specie scarper Model The model uses accounting data as input and the objective of the model is to derive equity value of a going concern. The value of equity is derived by deducting the value of debt (excluding deferred taxes and trade credits) from the total assets. Deferred taxes are regarded as part of equity (Brealey, Myers &038 Allen, 2006). There are several variations to the adoption of the model (Jennergren, 2008). The discounted cash flow (DCF) is more than adaptable to the valuation of a firm with luxuriouslyer(prenominal) level of assets in place and low level of unc ertainty active future cash flows (Joos &038 Zhdanov, 2007).Cash flows available for discounting include dividends, free cash flow to equity and free cash to the firm (debt and equity). A firm can experience three types of growth ranging from immutable growth, extravagantly growth to stable growth and high growth through transition to a stable growth. The discount rate could be all cost of equity, cost of debt or the weighted cost of capital (WACC). The choice of discount rate should depend on the type of cash flow (equity or firm) to be discounted. At least two models can be derived from the cash flow model.The Dividend Discount (DD) Model is suitable for a firm that pays dividends close to the free cash flow or where it is difficult to forecast the free cash flow to equity. The second model, Free Cash Flow Model is suitable where there is a significant margin between dividends and free cash flow to equity or if dividends are not available. The value of firm witnessing stable growth is given as CUsersjoseniD esk top D esk to pDISCOUNTED CA SHFLOW MODELS WHA T THEY A RE A ND HOW TO CHOOSE THE RIGHT ON E__filesImage8. if or a firm that experiences two stages of growth (i. e. high growth to stable growth), the value of the firm is CUsersjoseniDesk topDesk topDISCOUNTED CA SHFLOW MODELS WHA T THEY A RE A ND HOW TO CHOOSE THE RIGHT ONE__filesImage9. gif The value of a firm experiencing three levels of growth (i. e. high growth through transition to stable growth) is given as CUsersjoseniDesk topDesk topDISCOUNTED CA SHFLOW MODELS WHA T THEY A RE A ND HOW TO CHOOSE THE RIGHT ONE__filesImage10. gifWhere V0 represents equity value or firm value depending on which is discounted, CFt represents cash flow at time t, r represents cost of equity (for dividends or free cash flow to equity) or cost of capital ( for free cash flow to firm), g represents expected growth rate, ga represents initial expected growth (high growth period) and gn represents growth in a stable period n and n1 are defined as the period in a two stage growth and high growth in a three stage growth models severally while n2-n1 represents the transition period in the three stage growth model. . 3. 4. Dividend Valuation Model This is one of the commonest and simplest models for valuation of equity in the secondary market. The equity value is taken as the summation of discounted dividends receivable each year till the year of maturity and the price the equity is expected to be sold at maturity. The value of an investment is taken to be the discounted value of the cash flows.There are different variations to the model ranging from One period valuation one Period to multi-periods Po = D1/(1 + ke) + P1/(1 + ke) Po = D1/(1 + ke)1 + D2/(1+ke)2 ++ Dn/(1+ke)n + Pn/(1+ke)n multi- period and to indistinct length of time Infinity and, growth Po = D/(1+ke) (including Gordon growth) variations. D0(1+g)1 + D0(1+g)2 +.. + D0(1+g)? Po = (1+ke)1 (1+ke)2 (1+ke)? or 183 Po = International Res earch Journal of Finance and Economics Issue 30 (2009) D0 ke g) Where D = dividend paid / expected g = dividends growth rate = cost of equity or equity rate of return ke 1 n = period variation One of the motives so-and-so the use of this valuation model is to identify over and underpriced shares. Moving away from the simplest form of this model Go and Olhson (1990) introduced a more tasking process for generating dividends and returns on equity investment which they adopted in some more particular valuation models.The process is based on some assumptions such that equity holders would receive net dividends and there exists a linear relationship between variables. John and Williams (1985), and Miller and Rock (1985) argue that dividend is a communication tool for the firm to pass information to the market in the event of information asymmetry which implies that there is a positive correlation between information asymmetry and a firms dividend policy. 3. 0. Research Methodology We define the research hypotheses, sampling and data collection techniques as well as the statistical techniques used to test the data. . 1. Research Methodology We test the followers hypotheses Ho1 The earning per share significantly affects the stock price Ho2 The national gross domestic products significantly affect the stock price Ho3 The lending interest rate significantly affect the stock price Ho4 The foreign exchange rate significantly affect the stock price 3. 2. Model From the hypotheses, the stock price is a function of the impact of earning per share, dividend per share, gross domestic, interest rate and oil price.We restricted the influencing factors to quintuple as representatives of the firms fundamental factors and external (country) factors. A simple linear regression model derived from Al-Tamimi (2007) is adopted for the study. impertinent Al-Tamimi (2007) who included consumer price index (CPI) and money supply (MS) as sovereign variables, those variables wer e replaced with inflation rate (INFL) and foreign exchange rate (FX) in view of the significant impact they have on the economies of developing countries.SP = f (EPS, DPS, gross domestic product, INT, OIL, INFL, FX) Where, SP is the stock price EPS is the earnings per share DPS is the dividend per share GDP is the gross domestic product, INT is the lending interest rate, OIL is the oil price INFL is inflation and FX is the foreign exchange rate. SP is the dependent variable and it is used to regress the other independent variables (EPS, DPS, GDP, INT, OIL, INFL, FX) in the stock market. The outcome of the regression would be the variance on the dependent variable as resulting from the impact of the independent variables.To explain the effects of multicollinearity normally associated with multi-variables in regression analysis, multicollinearity test is conducted to explain the extent of correlation between the independent variables.. A multiple regression software (WASSA) was used t o test the multicollinearity among the independent variables before proceeding to conduct the regression analysis. International Research Journal of Finance and Economics Issue 30 (2009) 3. 3. selective information Sampling 184 There are over 130 companies whose shares are being traded in the Nigerian capital market.The Banking sector in the last five years has dominated the market in terms of trading volumes and market performance. The earning per share (EPS) and dividend per share (DPS) of twelve companies listed on the Nigerian Stock Exchange (NSE) and (average) annual GDP, crude oil price (OIL), lending interest rate (INT), inflation rate (INFL) and foreign exchange rate (FX) are used are analysed for effect on the stock price. The period covered by the data is year 2001 to 2007. The choice of the companies and period used for the data convocation depend on availability of data. . 4. Data Restructuring Weights are attached to EPS and DPS for each of the companies sampled for e ach of the year. The weight is derived as a ratio of the companys EPS or DPS to the total EPS or DPS of all the companies for each of the years. The weight is thereafter multiplied with the respective company EPS or DPS to derive weighted stock price (SP), EPS or DPS and thereafter all the companies weighted SP, EPS or DPS are summed together for each of the year (APPENDIX I). 4. 0. Findings and InterpretationIn a linear expression where more than two variables are deployed, multicollinearity between variables may not be govern out. A multicollinearity test is therefore conducted for all the independent variables. Using the Pearson coefficient of correlation, we consider any correlation between two variables > + 0. 75 as strong. For instance, from put off 1 below there is no significant correlation between earnings per share and dividend per share. Our explanations for it are into parts.First, all the companies in the sample account earnings per share for each of the years cover ed by the study though in some instances the EPS are negative but not all the companies declared and /or paid dividends throughout all the periods. Secondly, EPS move unlike DPS is largely outside the control of the Management. There is a strong correlation between crude oil price and GDP. The justification for the correlation between crude oil price and GDP can be found in the fact that the Nigerian economy predominantly depends on oil revenue.Table I DPS EPS GDP OIL INT INF FX Outcomes of the Multicollinarity Test (Pearson Coefficient of Correlation DPS 1 -0. 302 0. 609 -0. 395 -0. 498 -0. 521 0. 724 EPS 1 -0. 523 -0. 596 0. 366 0. 778 -0. 037 GPD 1 0. 959 -0. 702 -0. 492 0. 795 OIL INT INFL FX 1 -0. 706 -0. 434 0. 614 1 0. 988 -0. 424 1 -0. 313 1 A strong correlation also exist between INFL and INT which cogency be the result of manufacturers and service providers passing increased lending interest rate to consumers. A strong correlation exists between FX and GDP.Unexpectedly, there is a strong correlation between INF and EPS, we do not have any explanation for this relationship. For our regression analysis, OIL and INFL were dropped from the model. Though there is a strong correlation between FX and GDP, both variables are used in the regression. FX and GDP variables are significant to the economy of developing nations like Nigeria, therefore their elimination from the regression would result in a very high changeless (? ). 185 International Research Journal of Finance and Economics Issue 30 (2009)A regression analysis was run on the independent variables DPS, EPS, GDP and INT after dropping OIL, INFL and FX. Table I shows the result of the regression analysis. Table II Summary of the Regression depth psychology R2 0. 99996 ? 67. 2385 0. 3835 0. 0869 0. 3805 0. 8236 1. 9741 correct R2 0. 99978 T Test 9. 597 36. 259 33. 369 21. 809 7. 375 11. 214 received Error of Estimates 0. 4752 F Test 5385. 033 R 0. 99998 Constant DPS EPS GDP INT FX The s tock price (P) is highly sensitive to variation as indicated by R2 of 0. 99996. In other words there is 99. 9% and as a payoff of fact 100% in stock variation caused by the independent variables. The variability as measured by coefficient of variation (? ) is expectedly positive for DPS, EPS and GDP and expectedly negative for lending interest (INT) though quite significantly. The ? for DPS and EPS though positive were not significant. Many of the companies resorted to bonus come ins instead of dividends and the Nigerian investors are more interested in incomes rather than capital appreciation especially where the stock market performance is poor.The failure to declare and pay dividend leaves two negative impacts on stock prices. The existing investors are denied additional funds to invest and the potential investors seeking investment incomes are disapprove. The hypothesis that EPS affect stock price significantly is accepted. The positive GDPs coefficient in relation to the sto ck price is in agreement with some other studies (Udegbunam and Eriki,2001 Ibrahim 2003 Mukherjee and Naka 1995 Chaudhuri and Smiles, 2004). The ? is undistinguished at 0. 805 and this might not be unconnected with the increasing foreign reserve maintained by CBN from the harvest-feast of crude oil sales. The proceeds of the crude oil sales are not released to the economy for investment in various productive sectors of the economy but rather held in foreign economies as part of the CBNs monetary policies. The domestic economy is denied of the investments that would have occurred if the funds in the foreign reserve are released for consumption in the domestic economy. The hypothesis that the GDP affects stock price significantly is accepted.The coefficient of interest which is negative is expected and found to be significant. The negative coefficient of the lending interest rate is in agreement with the findings of Al-Qenae, Li &038 Wearing (2002), and Mukherjee and Naka (1995). alter interest rate is a strong tool in the give of CBN to influence the economy and where the interest is high as it is Nigeria where lending interest rates hovers between 22% and 25%, the accessibility of the investors to access funds is curtailed and the impact on the stock price would be negative as shown.The hypothesis that lending interest rate affects the stock price significantly is accepted The foreign exchange rates coefficient is significantly negative at significant level of 10%. This is not unexpected. Local and foreign investors tend to invest in an economy that has a very high currency exchange rate to foreign currencies. The local investors are discouraged from taking their funds out of the economy for fear of reduced buying while foreign investors are encouraged otherwise for increased get power. The hypothesis that foreign exchange rate affects the stock price significantly is accepted.Lastly, the constant (? ) is 67. 2385 (negative). This suggests that the minim um stock price in the market is < 0. We had initially excluded FX from the regression for the reason of its collinearity with GDP but the constant was negative and to a fault high. The inclusion of FX has reduced the negativity which is an indication that there are other important variable(s) that significantly affect the stock prices but not considered in this study. The stock price cannot be < 0 except the company is in liquidation. International Research Journal of Finance and Economics Issue 30 (2009) 186This raises an important question of what factor(s) could have accounted for the extra ordinary stock market performance in Nigeria between 2005 and 2007 where some stocks return over molarity% per annum. The nation House of Representatives Committee on Capital merchandises expressed disgust at the hike in the stock prices of companies in the banking and oil sectors (Thisday brand-newspapers, 2008). The hike which may not be a non-economic factor (such as political, unh ealthy competition, profiteering by issuers who are at the same time market investors) may be the omitted important variable accounting for the high ?. . 0. Conclusions and Recommendations The forces of demand and supply have direct effect on the stock price while the other indeterminate number of firm, industry and country factors influences the demand and supply factors. The effect, positive or negative the other factors aside from the demand and supply leave on stock price are not static rather changes. For instance, lending interest rate effect could be positive or negative depending on the aim of the CBN in deploying it as one of the tools for implementing monetary policy.The study has contributed to existing literatures in cocksure or raising new issues with respect to other factors influencing stock prices. Interest researchers may want to identify and examine the non-economic factor that account for the high constant (? ) which may not be unconnected with the current meltd own in the Nigerian stock market. Lastly, policy makers who are concerned about the growth of the capital market are better informed on how to deploy the monetary policies instruments as well other economic indices to discover the desired market growth. Bibliography 1 2 3 4 5 6 7 8 9 10 11 12 Allen, F. nd G. R. Faulhaber, 1989. Signaling by Underpricing in The initial public offering Market, Journal of pecuniary Economics, 23 Al Tamimi, Hussein (2007), Factors touch Stock Prices in The UAE financial Markets, Singapore Economic Review assemblage, https//editorialexpress. com/ convention/SERC2007 Al-Qenae, Rashid Li, Carmen Wearing, Bob (2002) The info Content of Earnings on Stock Prices The Kuwait Stock Exchange, Multinational Finance Journal, 6 Barclay, M. , and R. Litzenberger. (1988). Announcement Effects of New Equity Issues and The Use of Intraday Price Data. Journal of monetary Economics 21 Brav, Alon and J.B. Heaton (2003) Market Indeterminacy Journal of Corporation L aw, Vol. 28 Brealey, Richard A. , Stewart C. Myers, and Franklin Allen, (2006). collective Finance, 8th Ed. , Mcgraw-Hill/Irwin, New York Byers, S. S. and John C. Groth (2000) Non-Economic Factors and Asset Valuation Conference Papers on Alternative Perspective on Finance and Accounting, http//www. departments. bucknell. edu/management/apfa/dundee%20papers. htm Chaudhuri, K. and Smiles, S. (2004), Stock Market and Aggregate Economic Activity Evidence from Australia, employ fiscal Economics, (14) Chen, J. (2005), The Physical Foundations of Economics, World Scientific Publishing Co. , London. Clerc, Laurent and Christian Pfister (2001) The Role of Financial Factors in the Transmission of Monetary policy Bank for International Settlements, BIS Papers No 19, http//www. bis. org/publ/bppdf/bispap19h. pdf Corwin, Shane, A (2003) The Determinants of Underpricing for Seasoned Equity Offers Journal of Finance 58(5) Docking, Diane S. Koch, capital of Minnesota D. (2005), Sensitivity of In vestor Reaction to Market Direction And unpredictability Dividend Change Announcements, Journal of Financial Research 87 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 International Research Journal of Finance and Economics Issue 30 (2009) Easley, David, Soeren Hvidkjaer, and Maureen OHara, 2002, Is training Risk a Determinant of Asset Returns? Journal of Finance, 57 Giammarino, Ronald M. , and Tracy Lewis, (1989), A speculation of Negotiated Equity Financing, Review of Financial Studies, 1 Gompers, Paul A. , Joy L. Ishii, and Andrew Metrick (2003) Corporate Governance and Equity Prices Grinblatt, M. and C. Y.Hwang, (1989). Signalling and The Pricing Of New Issues, Journal of Finance, 44 Hartono, Jogiyanto. (2004), the Recency Effect of Accounting information, Gadjah Mada International Journal of Business, Vol. 6 No. 1 Hordahl, Peter and Frank Packer, (2007), Understanding asset prices an overview 2006 twilight Meeting of Central Bank Economists, Bank for International Settlements, BIS Papers, No. 34 Ibrahim, Mansor H. (2003), Macroeconomic Forces and Capital Market Integration A VAR Analysis for Malaysia, Journal of the Asia Pacific Economy, 8 (1) Jennergren, L. P. 2008) A Tutorial on The Discounted Cash Flow Model For Valuation of Companies, Working Paper Series in Business Administration, Stockholm School of Economics John, K. and J. Williams, (1985), Dividends, Dilution, and Taxes A Signaling Equilibrium, Journal of Finance, 40 Joos, Philip and Alexei Zhdanov (2007) Earnings and Equity Valuation in the Biotech Industry Theory and Evidence http//papers. ssrn. com/sol3/papers. cfm? abstract Kang, H. G. (2004) Disclosure-Risk Premium Asset Pricing Under unsymmetric Information, Manipulation and Ambiguity, Working Paper Series, Social Science Research Network, http//papers. srn. com/sol3/cf_dev/AbsByAuth. cfm? per_id=333508 Kislingerova, Eva, (2000) Using of The Economic Value Added Model for Valuation of a guild, Narodna Banka Slovenska, BIATEC, Rocnik, 8, 11 Koller, Tim, Marc Goedhart, and David Wessels, (2005), Valuation Measuring and Managing The Value of Companies, Wiley, Hoboken, New Jersey, 4th Ed. , Lee, Bong-Soo (2006) An a posteriori Evaluation of demeanoral Models Based on Decompositions of Stock Prices Journal of Business, Vol. 79, issue 1 Lo, K. and T. Lys, (2000) The Ohlson Model Contribution to Valuation Theory, Limitations, And Empirical Applications. Journal of Accounting, Auditing and Finance, 15 (3) Loderer C. F. , Sheehan D. P. , and Kadlec G. B. , 1991, The pricing of equity offerings, Journal of Financial Economics, 29 Miller, M. and K. Rock, (1985), Dividend Policy Under Asymmetric Information, Journal of Finance 40 Molodovsky, Nicholas (1995),A Theory of Price-Earnings Ratios, Financial Analysts Journal, 51( 1) Moore, J. S &038 Beltz, J. C (2002) Share Price Performance and Observable Factors A Perspective from Rule Induction, Small Business Advancement content Centre, http//www . sbaer. uca. du/research/TemporarilyDisabled&8212- wdsi/2002/pdffiles/toc. pdf Mukherjee, Tarun K. Naka, Atsuyuki (1995) Dynamic Relations Between Macroeconomic Variables and The Japanese Stock Market An Application of Vector Error Correction Model, The Journal Of Financial Research, XVIII. (2) Ohara, M. , (1995), Market Microstructure Theory, Blackwell Publishers Ltd, Malden, Ma Ohara, M. , (2003), Liquidity and Price Discovery, Journal of Finance, 58, 4 Preinreich, G. A. D. (1938), Annual Survey of Economic Theory The Theory of derogation Econometrica, 6 Rigobon, Roberto and Brian P.Sack (2003) Spillovers Across U. S. Financial Markets, National Bureau of Economic Research (NBER), Working Paper W9640 International Research Journal of Finance and Economics Issue 30 (2009) 37 38 39 40 41 42 43 44 45 46 47 48 188 Rock, Kevin, (1986), Why New Issues Are Underpriced, Journal of Financial Economics, 15 Ross, Stephen A. (1976) An Arbitrage Theory of Capital Asset Pricing. Journal of Economic Theory, 13 Sharpe, W. F. , (1964), Capital Asset Prices A Theory of Market Equilibrium Under Conditions of Risk, Journal of Finance, Vol. 19 Smith, Clifford W. (1977), Alternative Methods For genteelness Capital Rights Versus Underwritten Offerings, Journal of Financial Economics, 5 Thisday Newspapers (2008) Nigeria SEC Capital Market Loses N3 Trillion in Six Months, http//allafrica. com/stories/200810210014. html Tully, Shwan (2008) The Real Key to Creating riches Fortune Magazine cited in Kislingeriva, Eva Using of the Economic Value Added Model for Valuation of a Company Narodna Banka Slovenska, BIATEC, Rocnik 8, 11 Tymoigne, Erick (2002) Financial Inflation and Financial Convention Oeconomicus, Volume V, Winter 2002, Udegbunam, R.I. and P. O. Eriki (2001), Inflation and Stock Price Behavior Evidence from Nigerian Stock Market, Journal of Financial Management &038 Analysis, XX (14) Welch, I. , (1989) Seasoned Offerings, Imitation Costs, And The Underpricing Of Initial Public Offerings, Journal of Finance 44 Wessa, P. (2008), Free Statistics Software, Office for Research Development and Education, version 1. 1. 23-r3 Zhang, X. Frank (2004) Information Uncertainty and Stock Returns An Article Submitted to The Journal of Finance Manuscript 1149 www. afajof. rg/afa/ extravertive/zhang_information. pdf Zhao, Xing-Qiu (1999), Stock prices, inflation and output evidence from China, Applied Economics Letters, 6 Appendix Appendix I Selected Market Indices (2001 2007) YEAR PRICE* DPS* EPS* GDP** INT** 42. 53 430. 00 393. 29 431,783. 10 21. 34 2001 43. 70 432. 72 412. 52 451,785. 60 29. 70 2002 109. 21 577. 63 459. 83 495,007. 10 22. 47 2003 116. 76 552. 48 600. 59 527,576. 00 20. 62 2004 110. 56 466. 97 708. 90 561,931. 40 19. 47 2005 102. 33 553. 87 1,666. 03 595,821. 61 18. 43 2006 95. 87 549. 93 894. 96 561,776. 34 19. 1 2007 Source Central Bank of Nigeria Statistical Bulletin** Cashcraft Asset Management Limited / APT Securities and blood line Limi ted * OIL** 24. 50 25. 40 29. 10 38. 70 57. 60 66. 50 54. 27 INFLE** 18. 90 12. 90 14. 00 15. 00 17. 90 8. 20 13. 70 FX ** 111. 94 120. 97 129. 36 133. 50 132. 15 128. 65 131. 43 189 International Research Journal of Finance and Economics Issue 30 (2009) Appendix II Regression Analysis Of Selected Market Indices (2001 2007) Multiple one-dimensional Regression Estimated Regression Equation SPt = +0. 38353330161483 DPSt +0. 086971432931437 EPSt +0. 38049146437789 GDPt -0. 82357353121514 INTt -1. 740597666311 FXt -67. 238476376193 + et Multiple Linear Regression customary Least Squares Variable DPSt EPSt GDPt INTt FXt Constant Variable %DPSt %EPSt %GDPt %INTt %FXt %Constant Variable argumentation 0. 383533 0. 086971 0. 380491 -0. 823574 -1. 97406 -67. 238476 Elasticity 2. 201042 0. 359282 2. 221624 -0. 200986 -2. 822992 -0. 75797 Stand. Coeff. S. E. 0. 010577 0. 002606 0. 017447 0. 111666 0. 17603 7. 006084 S. E. * 0. 060703 0. 010767 0. 101869 0. 027251 0. 25173 0. 078979 S. E. * T-STAT H0 parameter = 0 36. 259468 33. 368601 21. 808584 -7. 375331 -11. 214366 -9. 597156 T-STAT H0 elast = 1 19. 785697 -59. 07274 11. 992081 -29. 320395 7. 241855 -3. 064493 T-STAT H0 coeff = 0 2-tail p-value 0. 017553 0. 019073 0. 029171 0. 085794 0. 056618 0. 066096 2-tail p-value 0. 032148 0. 010697 0. 052964 0. 021704 0. 087356 0. 200805 2-tail p-value 1-tail p-value 0. 008776 0. 009536 0. 014585 0. 042897 0. 028309 0. 033048 1-tail p-value 0. 016074 0. 005349 0. 026482 0. 010852 0. 043678 0. 100402 1-tail p-value 0. 008776 0. 009536 0. 014585 0. 042897 0. 028309 0. 5 S-DPSt 0. 763848 0. 021066 36. 259468 0. 017553 S-EPSt 0. 69251 0. 020753 33. 368601 0. 019073 S-GDPt 0. 729372 0. 033444 21. 808584 0. 029171 S-INTt -0. 09814 0. 013307 -7. 75331 0. 085794 S-FXt -0. 48017 0. 042817 -11. 214366 0. 056618 S-Constant 0 0 0 1 Computed against deterministic endogenous series * tonus Multiple Linear Regression Regression Statistics Multiple R 0. 999981 R-squared 0. 999963 Adjuste d R-squared 0. 999777 F-TEST 5385. 033289 Observations 7 Degrees of Freedom 1 Multiple Linear Regression Residual Statistics Standard Error 0. 475177 Sum Squared Errors 0. 225793 Log Likelihood 2. 086595 Durbin-Watson 3. 380955 Von von Neumann Ratio 3. 944448 et > 0 3 et < 0 4 Runs 6 Runs Statistic 1. 333946 NB Regression analysis was done using a software developed by Wessa (2008)