The title itself justify the importance of the research for the finance degree, however, the previous research done in this filed in Nepal is not satisfactory. This is the reason that made researcher to do some research in this topic hoping the conclusion made would be beneficial for investors and fill the gap between the researches. Financial markets can also be defined as the centers or arrangements that provide facilities for buying and selling of financial claims and services.
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In this term, the role of financial system in economic development has been a much-discussed topic among economists. Financial markets perform four important economic functions. First, they enable individuals to choose more effectively between current and future consumption. Second, the interaction between buyers and sellers in a financial market determines the price of the assets, or alternatively, the return demanded by investors to invest in the company. Firms can raise further capital if the return on their investments exceeds the return demanded by investors. Third, financial markets provide liquidity to investors. That is, the owner of the financial asset can sell off the asset in the marketplace to realize cash whenever required. The degree of liquidity may vary from asset to asset and market to market. Fourth, financial markets can discipline under-performing managements. The prevailing stock price of a company reflects the opinion of all market participants regarding the outlook for the company under the current management. The financial market consists of two division- money market and capital market. The money market is basically entitled to supply finance on short-term basis to individuals, businesses, enterprises, government and their agencies. The capital market, on the other hand, provides finance on medium to long-term basis to corporate bodies, government and their agencies (Al-Faki, 2006). Money market may be defined as short-term financial assets market, which facilitates liquidity and marketability securities. Actually it is the market for short-term market instrument having less than one-year maturity period. The fluctuation of money market interest rates reflects the demand and supply of funds in competitive market. The development of an efficient money market requires the development of institutions, instruments, and operating procedures that facilitate widening and deepening of the market and allocation of short-term resources with minimum transaction costs and minimum of delays. Thus, the money markets are the markets for short -term, highly liquid debt securities. Though money market is not a related topic on this research so basically capital market will be discussed in details. Capital Market plays a crucial role in any modern economy as they allow investors’ fund to flow to the most promising opportunities, i.e., the funds are mobilized and channeled efficiently from savers to the users of funds Capital markets provide an effective way of procuring long-term funds by issuing shares and debentures or bonds for corporate enterprises and government and at the same time provide an investment opportunity for individuals and institutions (Adhikari 2004). Thus, the market place for these financial securities is called securities market which is further subdivided into the primary and secondary market. The former market denotes the market for newly issued securities to the public whereas the latter market refers to the market for secondhand securities, traded previously in the primary market . Capital market plays a vital role in the national economy. It renders very valuable services to the community by increasing the productive capacity of the country & there by accelerating the ace of economic development. In short, the growth of economy is tied with the growth of capital market in the country. Capital market facilitates the allocation of funds between saver and borrowers. This allocation will be optimum if the capital market has efficient pricing mechanism. If the capital market is efficient, the current share prices of companies fully reflect available information and there is no question of share price being predicted for abnormal profit. The phenomenon of under or over-valuation of shares is possible only in an inefficient capital market. As the capital market is concerned with long- term finance, in the widest sense it consists of series of channels through which the saving of the community are made available for industrial and commercial enterprise and public authorities. It is mainly concerned with those private savings, individuals as well as corporate; those are turned into investments through new capital issues and also new public loans floated by government and semi government bodies. In the capital market demand comes from agriculture, industry trade and government while supply comes from the individual or corporate savings, intuitional investors and surplus of governments. It comprises the savers- individuals and institutions and bodies through which these savings are mobilized. The saving instructions like banks, investment companies’ specialized financial corporations and stock exchange are some of the important constituents of capital market. Purpose and Scope Development of capital is must for a sound industrial development of the country like Nepal where more than 85% of capital is raised from stock market. Stock Market are the catalyst for enchancing the operations of the entire domestic financial system and the Capital Market in particular (Kenny and Mosh 1998 cited by Obiakor and Okwu (2011). Capital market institutions help to mobilize the surplus unit to deficit unit for productive investments. As it mobilize the scattered resources and channels them in productive sector. It is an effective instrument of expanding productive capacities of the country. In Nepal, unfortunately, despite a history of half decade of planned economics activities to develop real sector of a country, little attention was paid to the development of financial sector. Over the past one and half decade financial sector, despite many problems, has developed significantly in Nepal. The growth of stock market is remained satisfactory because of low priority in the government financial reform policies. Stock Exchange in many countries has a long history of more than one century. For e.g. the India stock market has a history of more than 130 years. The stock exchange of Nepal has not so long history and it has faced so many ups and downs during this short history. However, gradual improvement in infrastructure and policy has given strong fundamental base for the Nepalese Capital Market. Establishment of NEPSE has given an opportunity to investors to invest in the enterprise sector and participate in the secondary market. Behavior of the stock prices shows the misevaluation of the stock price in the secondary market. The price earning information was not made available timely to the investors. The investors could not identify the good and bad stocks. So, the lack of value judgment to determine the stock price is the serious problem of the Nepalese stock market. This happens due to the inability of the regularity bodies of the stock market to regulate the market mechanism and failure to win the faith of the investors In the Nepalese context, there is the lack of wider investment opportunities, which provide good return. So, there has still been a huge amount of unutilized saving funds with public. But most of the public investor’s i. e. existing and potential are not well knowledgeable about the real financial strength and weakness of the public companies in which they are investing or going to invest their funds. Further they cannot well analyze and interpret the real financial position of a company on the basis of available data and information to reach the right conclusion. This study may help investors to think about restructuring their investment portfolio. Similarly potential investors may take better timely investment decision on the basis of the findings of the study. Capital market provides investors good investment opportunity with fair return and instant liquidity with minimum risk of loss it helps to mobilize financial resources for the investment in development project and thereby helps economic development of the country. The stock market also imparts liquidity to the securities holder. This offers an opportunity for investors to invest in long term venture, while market also enables to convert their securities into liquid cash before the maturity of the project. Furthermore they can invest their current income against their future income thereby achieve their time preference of consumption. The liquid market also promotes the primary issuances of share because investors participated in the issuance of share markets can get back the fund easily. The primary market is positively and highly elastic with the stock price and liquidity in the secondary markets. Usually the price of common stock in primary market is par value but in secondary market may be any price i.e. more than par value, less than par value and equal to par value. Stock price in secondary market is the main issue of this study. What could be the reasonable price paid for a stock in secondary market? What is the impact of the price trend, volume of stock traded and, Do the investors see the price trend, volume of stock traded and, others views while making investment decision? These are the burning issues regarding stock price determination of secondary market in Nepal. Capital market provides investors good investment opportunities with fair return and instant liquidity with minimum risk of loss. The stock market also imports liquidity to the security holders. Research Aims, Questions and Hypothesis Research Aims The aim of this research is to find out whether developed Capital Market brings any significant changes in share price behavior theories and thereafter effect in market index. Efficient Market hypothesis assumes that investors behave on the same way as they get information from the market and it is impossible to beat market and prediction of future share price. So, generally the aim is to look on the existence of weak or semi strong form of Efficiency Market Hypothesis (EMH) referring Nepalese Capital Market has been developed significantly since its establishment in Nepal. Research Questions What are the present state and status and elements that affect NEPSE index? Does developed Nepalese Capital Market follow the price behavior theories? Can financial literacy helps to create developed Capital Market? Research Hypothesis The dissertation formulates the following testable statement: H0: Capital Market has not developed in Nepal H0: There is no difference between NEPSE index before and after signaling factor H0: The successive or lagged price changes are independent Research Objectives The objectives of the study are as follows: To analyze the development /growth of Nepalese Capital Market and to examine if investors awareness help to develop capital market. To examine sector wise overall movement of NEPSE Sensitive index to find out risky sector To analyze the signaling factor’s and impact on stock price with the help of NEPSE index To examine which form of market efficiency ( weak or semi strong efficiency) exist in Nepal. Title “Capital Market Development and the behavior of Share Price in Nepal” Research Gap Although some very valuable researches in the field of Capital Market have been done so far, there is still a great deal of opportunity remained for researchers in the field in this area to explore and identify new facts and figures about the immature stock market of Nepal. This study will analyze the stock price determinants of common stock in secondary market of Nepal. Usually the price of common stock in primary market is par value but in secondary market it may be in any price. The price of common stock is largely influenced by different market related factors. Most of the studies on share price behavior conducted in the context of Nepal were based on secondary sources of information only. No study has been conducted on price fluctuation of stock price by using share brokers and individual investors as primary sources of information. There was a need to conduct a survey with the share brokers and individual investors who are the major stakeholders of the stock market, in order to find out more subjective facts on share price behavior, which cannot be testes through the use of the primary source of information. The earlier studies were done only in theoretical manner regardless of what the real market is going through while this study is analyzing the real market scenario like the impact of capital gain in the market or the political impact on Nepalese Security market. Nowadays, Nepalese share market has entered to the new horizon. Its size and market capitalization are growing day by day new Bye laws are being established to control stock market price. But it is clearly realized that share prices are fluctuating abnormally. If earning, dividend and net worth are taken as the main determinants of price fluctuating, then why the share prices are increased without the increment in such factors. Therefore there is still lack of appropriate researches to find out the causes of volatility of share price in Nepalese share market. Therefore, this study is analyzing the various reasons on the fluctuation of price trend and the same direction. Chapter 2: Literature Review Capital Market Karla (2006) defines capital markets as “the market which specializes in giving long term loans to the industry. In broad sense capital market incorporates intermediary institutions, capital formation, mobilization anf channeling of long term capital, as well as regulatory authorities. ( Obiakor & Okwu, (2011). Alile (2007) calrifies that the capital market is made up of markets and institutions which facilitate the issuance and secondary trading of long term financial instruments. Aligning with this, Osaze (2007) simply sees it as the market responsible for long-term-growth capital formation. Ologunde, and Asaolu (2006) conceptualize capital a collection of financial institutions set up for the granting of medium and long-term. Further, they considered the stock market as single nor even a dual market but rather a network of specialized financial institutions which, in various ways, help to bring together suppliers and users of long-term capital fund. The capital market is one of the most vital areas of the economy as it provides companies access to capital, and investors with a slice of ownership in the company and the potential of gains based on the company’s future performance( Ujunma & Modebe,2012), The capital market is unique in a country’s financial system because of its peculiar role in the economy. Levine(1991) cited by (Ujunma & Modebe,2012) identified these roles as: raising capital for business, mobilizing savings for investment, facilitating company’s growth, redistribution of wealth, promotion of corporate govemance, creating investment opportunities for small investors, government capital raising avenue for development projects and being a barometer of the economy. Improving the efficiency of the capital market has become a recognized means of meeting national objectives such as etihancing productivify and competitiveness, reducing local environmental costs associated with capital market transactions, promoting savings and investment on economic wide basis (Mark, 2011). At intemational level, it is considered a key element of sfrategy to mitigate the risk” of capital flight associated with lack of intemational investors’ confidence in the market. In this context, improving capital market efficiency in the developing and transitionhig countries is particularly important because these countries exhibit considerable potential for such improvement and, in the case of the developing countries, since they will contribute increasingly to the fiiture of the capital market as their economies grow (Ujunwa and Salami, 2010). On the other hand, The capital market is a collection of financial institutions set up for the mobilization and utilization of long-term ftmds for developing the long-term end of the financial system (Ologunge; Elumilade and Asaolu, 2006). In this market, lenders (investors) provide long-term funds in exchange for long-term fmancial assets offered by issuers. The market is an important institution for capitalist countries because it encourages investment in corporate securities, providing capital for new businesses and income for investors (Ujunwa, 2008). Capital Market Development Indicator There has been numerous research regarding to measure capital market development. Most of these research tried to link with economic development. Yet there is not any standardize indicator to do so. A study by Applegarth (2004) on levels of capital market development and economic growth in Asia and Sub-Saharan Africa shows that capital markets in Asia which continued to add several hundred companies to their exchanges annually experience sizeable increase in the momentum of private sector development, while the reverse was the situation in Sub-Saharan Africa that added fewer than 10 to their exchanges, except South Africa. Thus, using private sector development, liquidity. local savings, bank competition, remittances, corporate govemance, and enhanced economic policy as capital market development indicators, he showed that capital market development drives economic growth. Adeyemi (2009), using gross capital formation and number of quoted companies as measures of capital market development, found that capital market development has positive significant impact on economic growth. Basically, a more reliable measure of the relationship would need inclusion of appropriate stock market development indicators since, according to Obiakor & Okwu (2011). on their study they included other indicator than mentioned above such as gross domestic product, value of shares traded, market capitalization, gross capital formation, and foreign private investment in the functional relationship. Torre, Gozzi and Schmukler(2007), examined the impact of reforms of capital markets on economic development in Latin American countries. For measures of capital market development they used market capitalization, value traded, and capital raised. They used annual inflation rate and ratio of government deficit to GDP as alternative indicators of macroeconomic soundness. They included ratio of equity flows (portfolio equity flows and foreign direct investment [FDI]) to GDP as a measure of openness or effective integration with international capital markets. They established that GDP per capita, openness, shareholder rights, and the size of the economy are positively and significantly associated with market capitalization, while government deficits are negatively related to stock market development Obiakor and Okwu (2011) had considered relevant indicators of economic growth and performance of capital market, such are GDP, market capitalization value of shares traded foreign private investment and gross capital formation.
According to Soyede (2005) Primary market is a market for new securities. It is a platform where the company or government can raise money for investment or where already quoted companies can raise fresh funds for expansion. Both the Securities Board of Nepal (SEBON) and the Nepal Stock Exchange (NEPSE) are involved in primary market activities in Nepal.
This enhances the new issue market in many ways, it provides the means by which investor can monitor the value of their shares and liquidate them when they wish to do so. According to Pandey (2006), “it is a type of market where existing securities of a market are traded on daily and continuous basis. It is the market for existing securities. This consists of exchanges and over-the counter markets where securities are bought and sold after their issuance in the primary market”. Importance Of Secondary Market If there were no secondary market in which investors could turn investments in new issues back into cash when they choose, many investors would not buy new issues in first places. If any investors truly intend to make any irrevocable commitment of their funds, the availability of a secondary market is an absolute pre-requisite to the existence of a primary market in common stock. From the perspective of the overall economy, the secondary augmentation of the flow of funds into the new issue market is particularly important. It makes it possible for the economy to make long term commitment in real capital. This point is perhaps best illustrated by considering what would occur if the financial claims issued by firms and individuals could not be traded in the secondary market. The secondary market makes it possible for those who desire to make long term real investments to obtain the money capital of savers who have no intension of committing themselves for the long term. Thus, they provide the economy with the opportunity to consider entirely new approaches to building its capital stock (Josiah et.al, 2012)
Simply stock price behavior refers the movement of stock price in the secondary capital market, i.e., market value is more than book value, market value is less than book value and market value is more than book value due to the different internal and external factors. It always been panic to investors how their shares performs in market. By the nature, they always want to gain through security trading, which is impossible without proper understanding of market they invested.
A market is said to be efficient if it uses the information available correctly in setting and adjusting prices of securities. Inoga (1997: 24). Market efficiency refers to two essential ingredient of price adjustment to new information. Speed and quality (direction and magnitude) of the adjustment. The main effect of efficiency in capital market is that it precludes most investors from the capacity or ability to out-perform the market. But the market is deficient in term of speed and quality of it reaction, the sophisticated investors would have little difficulty in profiting from the situation. There are two important theories available Efficient Market Hypothesis (EMH) Random Walk Theory (RWT) Efficient Market Hypothesis EMH was first introduced in year 1964 by Eugene Fama in early 1960. Fama’s contribution in efficient market hypothesis is significant. The EMH states that the current market price reflects the assimilation of all the information available. This means that given the information, no prediction of future changes in the price can be made. As new information enters the system the unbalance state is immediately discovered and quickly eliminated by the correct change in the price. (fama 1970 cited by Falinouss, 200. According to Schumaker and Chen, 2006 has three different forms.
A market is efficient in the weak form if share prices fully reflect the information implied by all prior price movements. Share price movements become totally independent of previous price movement implying the absence of only price pattern with prophetic significance (Josiah et.al, 2012) Prices would only respond to new information such as new economic event of new industry. The implication of this is that historical price and returns information does not provide a basis for superior forecasting of future price or returns. Therefore past information cannot help investors beat the market and make excessive returns.
This is efficient on the semi strong sense if share price respond instantaneously and unbiased to new published information. The implication of semi strong efficiency is that current share prices would invariably represent the best interpretation of the information about the firm (Josiah et.al, 2012) Therefore, it becomes futile for investors to search for bargain opportunities from analysis of published data, such as annual reports or other corporate announcements designed to lure them to the market.
The market is efficient in the strong form if share prices fully reflect not only published information but also all relevant information including data not yet publicly available (Josiah et.al, 2012) To conclude the review on the efficient capital market theory, it can be asserted that if prices and returns prevailing at any point in the capital market do reflect all available historic and current public information, it will be difficult for investors to achieve superior performance by judging that security market conditions may be better or worse in the future.
In year 1900 a French mathematician, Louis Bachelier wrote a scientific paper suggesting, that day-to- day security price fluctuations were random which later known as Random Walk Theory. According to theÂ theory,Â stock price changes have the same distribution and are independent of each other,Â soÂ theÂ past movement or trendÂ of a stock price or market cannot be used to predict its future movement (Falinouss, 2007). In short, this is the idea that stock prices take a random and unpredictable path. Followers of the random walk theory believe it’s impossible to outperform the market without assuming additional risk.Â Random Walk theiry has similar theoretical underpinning to semi strong EMH where all public information is assumned to be available to everyone. However, RWT declears that even with such information, future prediction is effective. From EMH and RWT two distinct trading philosophies have been emerged. These two conventional approaches to financial market prediction are technical and fundamental analysis. In the following sections the distinction between these tow approaches will be stated. Tcehnical Teading Approach: Technical analysis is based on numeric time series data and tries to forecast stock markets using indicators of technical analysis. Iti si based on the widly accepted hypothesis which says that all reactions of the market to all news are contained in real time prices of stock. Because of this, technical analysis ignores news. Its main concern is to identify the existing trends and anticipate the future trends of the stock market from charts. But cha=rts or numeric time series data only contain the event and not the cause why it happened ( Kroha and Baeza- Yates, 2004). In technical analysis, it is belieived that market timing is critical and opportunites can be found through the careful averaging of historical price and volume movements and comparing them against current price. Technicians utilize chat=rts and modeling techniques to identify trends in price and volume. They rely on historical data in order to predict future outcomes (Schumaker and Chen, 2006). There are many promising forecasting methods developed to predict stock market movements from numeric time series. Autoregression and moving average are some of the famous stock trend prediction techniques which have dominated the time series prediction for several decays ( Sewell, 2008) Fundamentalist Trading Approach Fundamental analysis developed by Thomsett in 1998 investigates the factors that affect supply and demand. The goal is to gather and interpret this information and at before the information is incorporated in the stock price (Sutheebankjard and Premchaiswadi, 2010) In this philosophy, the price of a security can be determined through the nuts and bolts of financial numbers. These numbers are derived from the overall economy, the particular industry’s sector, or most typically, from the company itself. Figures such as inflation, indudtry return on equity(ROE) and debt levels can all play a part in determining the price of a stock. (Schumaker and Chen,2006). Capital Market Development and Awareness Capital Market have significant stake on Gross Domestic product (GDP) of the national economy which creates the employment opportunities through capital formation and growth as a whole. But, only existence of the capital market does not guarantee the significant contribution for the GDP and economic growth. The mechanism created the micro level saving mobilization, an opportunity and challenges, too. The financial literacy and awareness level might be the crucial elements for the healthy growth of the market. The term investor awareness has been used in investor communities frequently. It describes the investor literacy or knowledge about the investment environment or about the market. The level of awareness usually measures the investors’ exposure and knowledge or information about the indusr=try as a whole. It is significant since investors are expected to make their investment decisions based on these information and knowledge. Investor awareness is the knowledge of investment and about the important updates of the market. To expand and to achieve the sustainable growth of economy, investor awareness and their commitment for the long term investment play the vital role. Thus it is expected that the awareness and the commitment move in the same direction, and their association contributes a lot to the economic development. Capital market whihcis classified into primary market- raise the seed caoital through initial oublic offering and the secondary market-the only platform which retains the long term investment through exchange of the securities. More specifically, secondary market provides liquidity to the economy through the role of financial intermedries and those intermediaries have direct connected woiht the individual investors. Thus, they might be sufficient room at the end of brokage firms and the financial intermedriaries to play vital role for creating investors awareness in neplaese financial market(Kadariya,2012) Investor awareness is interchangeably used for terms like investor literacy, investor education, investor knowledge, etc because all of them help to create attentive investors. Fodor (2008) lack of investor awareness campaigns lead to the financial crime in the capital market. Like the increase in security enforcement increases the number of arrests. Adversely, increase in investor awareness campaigns leads to decrease in financoial crime. Obviously, the financial crisis of 2008 has highlighted institutional as well as individual investors’ awareness of risks (policy Research Institute(2008). Investors who claim to understand investment products hold more efficient portfolios Grahan et al (2005). Investors with low financial literacy are less likely ot invest in stocks (Van et. al, 2007). The online investors should have more knowledge than normal investors to succeed in the securities market because they are more likely to be sounded by financial misinformation and manipulation. Investors’ knowledge varied with people’s education, experience, age, income and gender ( Volpe at al.2002). According to Kadariya et al (2012),”Investor awareness is crucial for the investment decision making and sustainable growth of capital market”. They further explains that fully aware equity investors have more chances of holding high volume of equity investment. Equity investors with higher educational background have more investment than those with lower level of education (Kadariya, 2012) Capital Market: Global Perspective Modern capital markets have two related parts: (1) the debt and equity markets that intermediate funds between savers and those that need capital, and (2) the derivatives market that consists of contracts such as options, interest rate, and foreign exchange swaps, typically associated with these underlying debt and equity instruments. The debt and equity markets help allocate capital within an economy. The derivatives market helps investors and borrowers to manage the risks inherent in their portfolios and asset/liability exposures (Dudley & Hubbard, 2004) Capital markets have been the driving force behind the development of the UK and US financial systems. In the US, the capital markets have become the dominant element of the financial system in three ways. First funds raised in US debt markets now substantially exceed funds raised through the US banking system (McKinsley & company, 2011) Second, more 36% of US households owned equity in some form ( The Big Picture, 2012) Third, the derivatives market has grown extraordinarily rapidly. The notional value of derivatives securities outstanding rose to $244 trillion September 2011(Mann,2011) from about $6.7 trillion at year-end 1990. Intrest rate swaps has an estimated of 82.1% of derivatives representating the biggest share of this market 10.6% in foreign exchange rate swaps, 6.1 % in credit derivatives, and 1.2 % are in commodities and equity contracts(Comptroller of Currency Administrator of National Banks, 2012) Source: The Big Picture, 2012
The global capital market is gaining depth every day. Along with the development of this market, the liquidity is also growing at a rapid pace. financial stocks are growing worldwide and their growth rate is much higher than that of global gross domestic products (AllianceBernstein,2012)Â the size of stock and bond markets around the world in August 2011, shows that global capital market has reached all time high with $ 212 trillion of which about 75% consists of bonds ($175 trillion) and about 25% of stock ($54 trillion) ( McKinsley & company, 2011) and the total derivatives has reached to $700 trillion at the end of August 2011(Mann, 2011) The development of the global capital market can also be traced by the fact that the financial holdings of the world is growing quickly. The global stock of debt and equity grew by $11 trillion in 2010 (McKinsley & company, 2011) and this amount is expected to cross the $250 trillion mark by the end of 2015 (finance, maps of world, 2012), where as the value of the global market increased by 5% in 2010 to $ 54.9 trillion following a 45% rise in the previous year (Maslakovic, 2011) In these circumstances, the US is playing a vital role in the development of the global capital market and, alone, is the destination of 85% of the net capital flow of the entire globe. Britain also plays a significant role in the market. (McKinsey & Company, 2011). separate data from Securities Industry and Financial Markets Association (SIFMA), puts the US bond market at just under $37 trillion (63.4%) as of the end of 2011 and Bloomberg puts US stocks at about $ 24.2 trillion (36.6%) by the end of April 2012 ( qvmgroup,2012). Development of capital market Market capitalization of listed companies (% of GDP) Source: World Bank 2012 and the Author Note: India’s data excluded (very big numbers), Afghanistan, Bhutan, Maldives data are not available Source: World Bank 2012 and the Author Capital Market: Asia In the past few decades, Asian countries have experienced a tremendous economic growth, although temporarily interrupted by the Asian financial crisis. Along with the strong economic growth, capital markets in this region have shown a rapid expansion, and have played an increasingly important role in fostering economic development (Hsu, 2000). Hsu further explains, Asian countries have enjoyed abundant savings. Some countries in this region have domestic savings rates of more than 30 percent. In no other regions in the world do countries have such large reservoirs of domestic savings at their disposal. Asian’s high savings rates have provided the platform for robust capital markets. While Asia has been preoccupied with economic recovery and financial reforms over the past few years, the economic structures of most Asian countries have been gradually modified, and their capital markets are also in the process of transformation. Along with these changes, several key trends are emerging in the region’s capital markets. (South Asian Capital Markets Conference,2010) Equity Capital Market (ECM) in Asia (excluding Japan) have had a dismal fourth quarter so far, rainsing just $22 billion, worst result since the first quarter of 2009($14 bn) and year to date, ECM volume is down 44 percent from 2010 issuance of $291.1 bn to just 162.4 bn (Keohane, 2011) https://blogs.r.ftdata.co.uk/beyond-brics/files/2011/12/Asia-Ex-Japan-ECM-volume.png Source : Dealogic cited by Keohane, 2011. Capital Market Development in Nepal Institutional development of securities market in Nepal started from the year 1976 when Securities Exchange Centre (SEC) was established under the companies act with the joint capital contribution of Nepal Rastra Bank (NRB) & Nepal Industrial Development Corporation (NIDC). The Industrial Policy of the government also encouraged the promotion of securities exchange activities in Nepal. Nepal government under a program initiated to reform capital market converted SEC into Nepal Stock Exchange (NEPSE) in 1993. NEPSE is non-profit organization, operating under Securities Exchange Act, 1983. Nepalese capital market was given proper structure in June 1993 with the establishment of Securities Board of Nepal (SEBON) as the market regulator. Since its establishment, SEBON has been concentrating its efforts on the legal and statutory frameworks, which are the bases for the healthy development of capital market. SEBON Nepal is the supreme body to regulate the Nepalese securities market (Bhusal 2010, Dangol 2008, and Gurung 2004). As a part of its continuous efforts to build a sound system, the securities exchange act, 1983 was amended for the second time on January 30, 1997 (Give reference..) This amendment paved the way for establishing SEBON as an apex regulatory body as it widened the horizon of SEBON by bringing Market intermediaries directly under its jurisdiction and also made it mandatory for the corporate bodies to report annually as well as semi annually regarding their performance. After the inception of the Securities Exchange Center, shares of various manufacturing, trading and banking companies became listed. Interestingly, the listed shares were dominated by public enterprises during this stage. Between 1984 and 1990, 42 companies were listed, out of which more than 25 companies had some form of government ownership (Bhusal 2010). However, after the democracy the trend has totally changed and the listed number of companies reached at 207 by the end of Fiscal Year (FY) 2010/11  , while the government ownership companies had decreased due to the privatization that took place in different planning stage of privatization act. The main objective of SEBON is to promote and protect the interest of investors by regulating the securities market, to monitor and control the entire capital market, sale and distribution of securities and purchase, sale or exchange of securities. SEBON was established with the objective to render contribution to the development of capital markets by making securities transactions fair, healthy, efficient and responsible. Whereas, its main function are to provide licenses to stock exchange and securities business person and to monitor the activities carried by NEPSE to know if they are in accordance with the law or not (SEBON Annual Report 2010/11). In year 2010/11, the market capitalization had reached to 6665.33 and equity capital dominated the NEPSE with 94% and bond market ( government bond) has very minimal presence of 1.55% Structure of Capital Market in Nepal Source: NEPSE Annual Report, 2010/11, 2006/07 Chapter 3:RESEARCH METHODOLOGY Introduction This chapter refers to the overall approach to the research process, covering from theoretical underpinning to the collection and analysis of data. It is composed of both parts of technical aspect and logical aspect. Specially, this chapter has focused on research design, sample size, sample selection procedure, data collection procedure, data processing, period covered, data analysis tools such as Financial and statistical tool are discussed Research Design “A research design is the arrangement of conditions, for collection and analysis of data in such a manner that aims to combine relevance to the research purpose with economy in procedure” (Shrestha,2010). The research design of this study is descriptive and analytical in nature. This study includes both qualitative and quantitative data .To facilitate research, data of concerned sampled companies are collected and they are tabulated and analyzed by using different financial and statistical tools. Data related to Capital Market ( primary and secondary) had been widely searched and tabulated and analyzed vigorously. Population and Sample Studies In the FY( Fiscal Year) 2010/11, with the listing of 33 new companies, merged of two companies to form single company and delisted of Nepal Development Bank, the total number of listed companies reached to be 207 an increment of 18% , resulting total capitalization to NRs. 323484.34 million which is less than 14.26% compare to last FY 2009/10 (SEBON, Annual Report 2010/11) All of the listed companies in the NEPSE considered as population and certain of among will be the sample companies of the study. Among them, 9 companies have been taken as sample for the study, which represents 4.35% of the population.
Source: NEPSE Annual Report 2010/11 The names of the sampled companies are as follows: Source: SEBON Annual Report 2010/11, NEPSE annual Report 2010/11 The enterprises selected for the study can be considered as representative of all sector categorized by NEPSE Sources of Data Both primary and secondary data from 2006/07 to 2010/11 are analysesd in this research. For different objectives different sets of historical data has been obtain from World Bank, SEBON, NEPSE and sampled company’s Annual Report from the wesite. Addition to that open ended and close ended questionnaire have been developed to achieve research objectives. Data Collection Procedure The data upon which this study is made are basically secondary in nature. The secondary data have been used extensively. Top of that 100(estimated) close ended questionnaires and 15 (estimated) open ended questionnaire are distributed. Primary data has been transferred to SPSS for through analysis. All the collected data and information have been properly arranged, synthesized, tabulated and calculated to arrive at the realistic analytical steps. Tools for Analysis The following model has been used to work out to find out the answer to hypothesis 1 and objective 1. H0: Capital Market has not developed in Nepal Model 1: The assumption behind the measure is that market size is positively correlated with the ability to mobilize capital and diversity to risk (Joshi, 2010). For the purpose of testing the theoretical relationship between MCR and per capita GDP (Joshi, 2010), number of traded & listed companies (Gurung, 2004), Karl Pearson’s coefficient correlation (r) has been calculated. Significance of relationship has been tested by probable error (P.E.) Decision Criteria, If r < P.E., then correlation is not significant. If r > 6 P.E., then correlation is significant. If P.E.< r < 6P.E., then nothing can be concluded Model 2: At = A0 (1+gn) Whereas: At = values at the end of the FY A0 = value at the beginning of the FY n = t-1, time period over which growth take place g = growth rate Assumption using above model is that development is the core aspect which can be measure by the growth as a whole (Gurung, 2010). For this purpose different indicator of NEPSE index has been calculated, i.e. public issue and issue amount, number of transaction and annual turnover, paid up value and market capitalization and securities business persons etc. Objective 2 As capital market developed, there are possibilities to diversify investment. Generally, more investors are attracted to safer investment; however, there has been tremendous investment across different sectors. So, it is necessary to categorize riskier sector in NEPSE. For this purpose, historical NEPSE sensitivity index of different sector (sample size includes one company from each sector) have been analyzed. Descriptive statistics has been used to analyze this objective. Moreover, primary data has also been collected to justify if the perception of the investors shows the same as from secondary data. Objective 3 Basiclally, the share market is closely linked with the political system. So, the political situation is one of the main factors to affect the capital market. Similarly, the Nepalses capital market is mainly based on individual investors’ and the general rumor and minor political changes affect their minds (Rising Nepal, 2011) So, this objective has been designed to analyze whether the stated argument is true or not. For this purpose t – test has been used. H0: There is no difference between NEPSE index before and after signaling factor Model: t-Test: Paired Two Sample for Means where ÂÂ³ is unknown. Whereas, = mean of NEPSE index before signaling factor = mean of NEPSE index after signaling factor = unknown, equals to 0 = number of sectors before signaling factor = number of sectors after signaling factor = pooled standard deviation and it is derived from, Whereas, = standard deviation of sample NEPSE index before signaling factor. = standard deviation of sample NEPSE index after signaling factor. Degree of freedom = 9 + 9 – 2 = 16 Decision Criteria: if t stat value > t critical value , reject Null Hypothesis otherwise do not reject Null Hypothesis if t stat value< – t critical value , reject Null Hypothesis otherwise do not reject Null Hypothesis Different signaling factor that happened during the observed period has been analyzed. To conclude in reasonable manner t- test of NEPSE index (before and after) of that particular factors has been analyzed. Signaling factors considered for the study are: December 24, 2007 End of Monarchy August 16, 2008 Coalition government lead by Maoist Leader May 23, 2009 Resignation of First Maoist Prime Minister May 28, 2011 Constituent Assembly fails to meet fro drawing up new constitution July 15, 2011 Capital gain tax reduced to 5% from 10% Objective 4 When capital market tends to develop then that market tends to be efficient, where share price fully reflects the information to market participants and that by implication, share price cannot be predicted as it holds semi strong form of EMH or at least RWH or a weak form. To achieve this objective two different model has been used. Estimated multiple regression analysis Run test Assumption: Nepalese Capital Market hold weak or semi strong efficiency market hypothesis. Estimated multiple regression analysis Model : Correlation of different variables such as dividend per share (DPS), Earning per share (EPS) and net worth per share (NWPS) has been analyzed before using above mentioned model to see whether independent variables like DPS, EPS and NWPS have any impact over dependent variables i.e. MPS. r = Whereas, n = number of observation (year) X = dependent variable (MPS) Y = independent variables ( DPS, EPS, NWPS) Significant of correlation has been tested by P.E. as explained above. For this purpose, historicial financial data has been collected from NEPSE, SEBON and sampled company’s annual report. Run Test A run can be defined as a sequence of consecutive price change of the same sign followed and preceded by price change of other sign. Runs test is a non- parametric test, which can also be used to examine the independence of a series as a check of results generated by serial correlation tests. Runs test is performed to examine whether the actual number of runs confirmed to the expected number of runs under the independent Bernoulli process. For this purpose, daily and monthly closing price of sample company has been analyzed. Daily run test covers the period from April 1, 2012 to August 15, 2012 , and monthly run test covers June/July 2011 to June/ July 2012) Model Whereas, no = number of zero run n1 = number of one run n = n0 +n1 = total number of runs R = observed number of runs E(R) = expected R S(R) = standard deviation of R Decision has been made according to p-value, where it states that p-value Â£ 0.05: reject H0, p-value Â³ 0.05, do not reject H0 . Objectives 5 Cross tabulation has been employed to justify investor awareness and level of investment. It has been argued by Kanadariya and Et.al (2012) that investors awareness and easy access to information had increased level of investment. Assumption: “Ã¢â‚¬Â¦Ã¢â‚¬Â¦Ã¢â‚¬Â¦Ã¢â‚¬Â¦Ã¢â‚¬Â¦Ã¢â‚¬Â¦ The financial literacy and awareness level might be the crucial elements for the healthy development of the Capital Market”, ( Kanadriya & et.al, 2012). Validity, Reliability While selecting the listed enterprises, extensive editing and validation procedures were undertaken to ensure quality and accuracy. The companies are screened using the variables like market capitalization, volume and frequency of transaction, first listed company among the sectors, maximum trading days, maximum traded amount, continuity of transaction to represent the listed enterprises in Nepal. Proper care has been taken to represent all the sectors, as categorized by NEPSE. As all the secondary data is obtained from the NEPSE, SEBON and related company’s website, however, there has been problem to access some of the company website. Some of the website’s are not updated and the necessary figure has been obtained from NEPSE, so there could be general mistake on some numbers. For example: in NEPSE website some data were wrong and careful investigation has been made to confirm such mislead numbers and verified by cross inspection. i.e. SEBON and NEPSE data, NEPSE to company data. Chapter 4: Data Presentation and Analysis Objectives 1 Model 1: Correlation
per capita GDP (Rs.) r2 P.E. 6P.E. per capita GDP (Rs.) 1
MCR 0.610752479 0.37301859 0.18912684 1.134761038 Nothing can be concluded as P.E.> r > P.E.
Capital market size can be measured by market capitalization ratio (MCR). MCR has an increased trend since 2006/2007 to 2008/2009 and suddenly it decreased by 20% in preceding year. But it has reached to highest of 58% in year 2010/2011. Correlation shows positive relation with per capita GDP but relation not significant between the variable. Number of Listed and Traded Companies
listed companies r2 P.E. 6P.E. listed companies 1
Traded companies 0.970985153 0.942812168 0.017250518 0.103503106 Correlation is significant as r > 6P.E. The number of traded companies is almost in increasing trend. But the securities traded in NEPSE are fluctuating during the study period. The growth rate of listed companies during the study period is 7% and it is 12% in the case of traded companies. Similarly, the growth rates of listed and traded securities are 29% and 14%. Karl Pearson’s Correlation Coefficient (r ) between traded and listed companies is 0.970985, highly positive correlated and their securities is 0.576611, positively correlated. Since, in listed and traded companies’ shows a significant case as ‘r’ is greater than 6 P.E. i.e. r = 0.970985153 > 0.103503106 = P.E.
2006/2007 135 0%
2007/2008 142 5%
2008/2009 159 12%
2009/2010 176 11%
2010/2011 207 18% 7% 222 12% 12% Public Issue and Amount (Amount in millions)
2006/2007 16 220%
2007/2008 18 13%
2008/2009 11 -39%
2009/2010 37 236%
2010/2011 16 -57% 21% 2028.44 -35% 32% Source: SEBON Annual Report (2005/06 – 2010/11) The number of public issue approval of the companies remains fluctuating. It shows an increasing trend FYs 2005/2006 to 2007/2008, and fluctuating the following years which was just 16 in FY 2010/11 decreased by 57% on year on year basis. But, the empirical result reveals that the overall growth rate of number of companies issue approval was 21% during the study period. The amount of issue approval shows ups and downs during the study period. In the 2005/2006 to 2009/2010, the growth rate on yearly basis is positive with highest amount approval of Rs.3144.7 million in 2009/2010. The amount of issue approval indicates an absolutely attractive growth trend from FY 2005/2006 to 2009/2010. The study found that the overall growth rate of public issue approval amount is 32 %. Number of Listed and Traded Securities (Amount in millions)
2006/2007 243504 7%
2007/2008 321131 32%
2008/2009 637868 99%
2009/2010 821746 29%
2010/2011 1033674 26% 29% 26240.39 0% 14% The percentage of traded companies over listed companies is more than 5% in each FY. Similarly, the percentage of traded securities over listed securities ranged between 14% to 29% during the study period. Similarly, the overall growth rates of listed and traded securities are 29% and 14%. Number of Transaction and Annual Turnover (Amount in millions)
2006/2007 120510 24%
2007/2008 150800 25%
2008/2009 209091 39%
2009/2010 213733 2%
2010/2011 302364 41% 21% 6665.33 -44% 12% The number of annual transactions shows increasing trend during the study period. It has increased from around 97 thousands to 103 thousands. The highest growth rate (39%) took place in 2008/09. However, the overall growth rate during the study period is 25 %. Annual turnover in stock exchange has fluctuated between Rs.8360.1 million to Rs.21681.14 million in the past five FYs. The growth rate of annual turnover is 12 % over the observed period. The percentage of turnover on paid up value has fluctuated between 2% and 41 %. As such, the increasing trend in number of transactions implies the higher liquidity and attractiveness in securities, but decrease trend after 2007/2008 on annual turnover indicate an un attractiveness in securities. Paid up Value and Market capitalization (Amount in millions)
2006/2007 21798.8 9%
2007/2008 29465 35%
2008/2009 61140 108%
2009/2010 79356 30%
2010/2011 100238 26% 31% 323484.34 -15% 22% The amount of paid up capital has increased in every subsequent FYs. However, the annual growth rate has not increased in the same ratio. Paid up capital of overall listed securities has increased from Rs. 21798.8 million in 2006/2007 to Rs.100238 million at the end of 2010/2011. The overall growth rate is 31 % over the observed period. This indicates the pace of investment in corporate sector through securities is hiking up. The market capitalization based on closing market price of listed securities was worth of Rs. 186301.3 million in 2006/2007. The overall growth rate of the market capitalization during the study period was 22% where capital had lost 134067.7 million during single FY in 2009/2010. Security Businessperson
2006/2007 33 0%
2007/2008 32 -3%
2008/2009 40 25%
2009/2010 34 -15%
2010/2011 52 53% 8% In the FY 2006/2007, there were altogether 33 securities businesspersons which increased to 52 an overall growth of 8%. In the total number of securities businesspersons, more than 74% is dominated by stockbrokers over the study period. Objectives 3 Data are based on Fiscal Year ended Base year (17 July 2006) = 100
2006/07 181.07 196.64 113.18 153 160.74 136 175.08 2007/08 241.41 248.05 270.63 254.23 434.44 164.00 253.72 2008/09 200.16 162.44 201.80 210.94 213.03 170.00 198.77 2009/10 114.08 109.68 174.57 167.64 139.65 172.80 119.32 2010/11 82.52 75.58 115.31 122.28 83.87 191.24 89.44 Commercial bank index had followed the same trend like as sensitive index (SENEX). As SENEX shows the systematic risk of the capital market and can be compared to the other sector to evaluate how risky is the sector is? So, from the above analysis it can be viewed that th systematic risk of the bank is same as the market and likelihood of effects is positively related. On the other hand, finance sector indexis more volatile and fluctuated more than any other, showing clear picture that this sector is more riskier. Increasing trend has witnessed all in a good shape but while its sleeping from the ultimate high point on 2007/2008, then it is clear that Development Bank had been affected most followed by the Financial sector. Hydropower and Commercial Bank had almost the same pattern of movement, however it is surprising to see the increasing trend of the manufacturing & processing sector had not been affected and is in more relaxed compare to others. Objectives 4 H0: there is no difference between NEPSE index before and after signaling factor Decision Criteria: if t stat value > t critical value , reject Null Hypothesis otherwise do not reject Null Hypothesis. if t stat value < – t critical value , reject Null Hypothesis otherwise do not reject Null Hypothesis.
SF 1 December 24, 2007 End of Monarchy 0.0553 Â± 2.1199 Accept SF 2 August 16,2008 Coalition government lead by Maoist Leader -0.0213 Â± 2.1199 Accept SF 3 May 23,2009 Resignation of First Prime Minister -0.0502 Â± 2.1199 Accept SF 4 May 28,2011 Constituent Assembly fails to meet for drawing up new constitution 0.0837 Â± 2.1199 Acc
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