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Capital Market Development Behavior Share Price In Nepal Finance Essay


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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. And 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. Borrowing enables individual to consume more, whereas leading enable them to postpone consumption. The economic units that have a surplus (investors) invest in those that have deficit (borrowers). This provides capital to companies in excess of those generated out to business income.

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).

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

Developing more complete and deeper capital market would enhance a countries growth potential and innovation (Andritzky, 2007). The forces of globalization, technology, new forms of competition have noticeably transformed capital market worldwide (Hassan, 2004).

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 shot-term resources with minimum transaction costs and minimum of delays. Thus, the money markets are the markets for short -term, highly liquid debt securities.

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 under- priced and over-priced. 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.

An efficient capital market is an essential pre-requisite of economic development and the development of capital market in a country is dependent upon the availability of savings, proper organization of intermediary institutions to bring the investors and business ability together for mutual interest, regulation of investment etc.

In an efficient capital market, liquid will channel quickly and accurately where it will do the community best. Such efficient market provides ready financing for worthwhile business ventures and drain capital away form corporations, which are poorly managed, or producing obsolete products. It is essential that a country should have efficient capital markets if that country is to enjoy highest possible level of wealth, welfare and education for its population (Bhalla, 1997, cited by Dangol 2008). Growth of industrial enterprise in a country is limited by the availability of savings. A well-developed capital market presumes the existence of not only the investors - individual and institutional, but more significantly the existence of a network of specialized institutions and agencies, which are always on the look - out for investment in new ventures.

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

The dissertation tries to help to create the importance of capital market and movement of share price. Efficient Market hypothesis assumes that investors behave on the same way as they get information from the market. To do justice with the study following aims and questions have been set as the predetermined requisition.

Research Aims

The aim of this research is to find out whether developed Capital Market brings any significant changes in share price and thereafter effect in NEPSE index.

Research Questions

What are the present state and status and elements that affect NEPSE index?

Does developed Nepalese Capital Market follows 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 prime objective of the study is to analyze the movement of stock market and the effect of share price of sampled companies. However, the specific 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 analyze price behavior theories based on estimated multiple regression analysis and run test.


"Capital Market Development and the behavior if 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 identity 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 impact of global recession on the 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 cause and effect of different signaling factors over stock price. In addition to this, it also tends to give some measures that should be taken by related parties to develop the Capital Market. Thus, the earlier studies on share price behavior needed to be updated and validated because of the many changes taking place in the stock market in Nepal. This study is an effort to attempt in the same direction.

Chapter 2: 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)

In the United Kingdom and in the United States, both of these parts have grown very rapidly over the past few decades. The capital markets in the United Kingdom and the United States dominate these countries' financial systems, in marked contrast to France, Germany, and Japan, where banks are more important. Regardless whether one examines the UK or the US over time, or compares the performance with other developed countries on a cross-sectional basis, the conclusion is unmistakable.

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)

Figure look at PC

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) 

Capital market represents the securities market where stocks, bonds, and several other derivatives are traded, and both long and short-term debts are raised here. This market provides companies, as well as governments with necessary funding, and, simultaneously, grants investors with the opportunity to make regular income (Dodoo,2007). 

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 before 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)

separate data from 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 $ 21.4 trillion (36.6%) by the end of April 2012 ( qvmgroup,2012).

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)

Development of capital market

Market capitalization of listed companies (% of GDP)

Picture lookat PC

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. 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.

First of all, Asian capital markets are expected to continue to grow and their market capitalization is expected to increase further, as the Asian economy is expected to recover steadily and require increasing capital to meet its investment needs. Also, in some Asian countries, technology-intensive industries have developed rapidly and hence a large sum of capital is needed.

The acceleration of privatization programs will also increase market capitalization in this region. The floatation of large state-owned enterprises will generally be the largest new issues on Asia's stock markets. In addition, because of easier practices for companies to go public, IPO¼ˆinitial public offering¼‰issues will flourish and increase market capitalization further.

The world of investment is set on a path of rapid change cutting across culture, time and language barriers. We are looking at a new era of deregulation and the standardization of the regulatory environment, together with the introduction of international accounting standards (Takaya, 2000). However there is an argument that asia's capital market is no expection to Global markets as it had a risk off 2011. Investors' search for safe havens has left Asian market in a muddle state with equity capital volumes slumping to lows not seen since 2009 (Keohane, 2011).

Equity Capital market (ECM) in Asia (excluding Japan) have had a dismal fourth quarter so far, rainsing just $22 billion, their 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)

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Source : Dealogic cited by Keohane, 2011.

Capital Market: 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 & Nepal Industrial Development Corporation. 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 securities exchange centre 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, 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, Gurung 2004 and Dangol 2008). As a part of its continuous efforts to build a sound system, the securities exchange act, 1983 was amended for the second time on Jan 30, 1997. 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, Gurung 2004 and Dangol 2008). 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) 2010/2011 [1] , 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)

Despite this, Nepalese stock market is still underdeveloped and there is lot of shortcomings in Nepalese stock market. Hence, the present study is conducted on Nepalese stock market in order to find out its potential of development, major problems and prospects by using secondary as well as primary data.

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 like 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.

Udegbunam (2002), in an attempt to estimate the impact of openness to trade and stock market development on industrial growth in Nigeria for the period 1970-1997, related industrial output growth to openness to world trade, stock market development and a set of control variables in a simple model he adapted from the stock market and economic growth model formulated independently by various previous researchers done during 1995 and 1996.

Udegbunam's empirical evidence strongly suggests that openness to world trade and stock market development are among the key determinants of industrial output growth in developing economy.

By implication, this translates to economic growth via sustained increases in GDP.

However, he identifies other important factors as human capital input, non-military expenditure, and inflation. The variables included in his model were industrial output, stock market capitalization- GDP ratio. Non-military expenditure-GDP ratio, school enrolment, inflation rate, maximum lending rate, openness to international trade, and GDP. To measure the impact of openness and stock market development on industrial output, he regressed industrial output growth on the rest of the indicators. The result provided a strong support lor openness and financial development hypothesis which posits that industrial growth is strongly motivated by trade liberalization. The result also shows evidence of a strong positive relationship between stock market development and industrial production. This result is consistent with empirical findings since 1994 to 1996.

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. The equity flows are intended to measure foreign demand for domestic equity. The FDI represents purchases of existing equity in global 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. Countries with sounder macroeconomic policies, and more financial openness, tend to have better growth opportunities, higher trading activities, more capital raising, and attracts more net foreign direct investment. However, they submitted that despite numerous reforms, Latin American and other developing countries' capital markets have not lived up to expectations.

Some researchers argued as since earnings growth should be closely related to overall economic growth, growth in current prices will portray market capitalization as preceding and, therefore, causing economic growth even if the true link runs in the reverse direction. Thus, they substituted indicators of market development that are independent of stock prices. Given that the role of a market is to reallocate capital to its most productive use, they considered such indicator to be turnover velocity (ratio of turnover to market capitalization), because it has been purged of forwarding-looking price effects. They also used annual percentage increase in the number of listed companies as an indicator of financial deepening. Further, they posit that financial markets promote growth better when not distorted by government policy.

They divided countries into three groups based on per capita income, since impact of stock market development on growth varies across levels of development. They observe, over the period, that markets in lower income countries grew more rapidly than higher income ones; freer markets appeared to grow less rapidly than less free ones. Both market capitalization-GDP ratio and turnover-market capitalization ratio are higher for higher income markets. Their study further reveals that lagged growth rates are, in general, significant predictors of current rates, with the effect being quite strong for high and middle income countries and relatively weak for lower income countries.

For the financial variables, they found a positive link between market capitalization and future growth. They posit that the positive link is likely to be because efficient markets incorporate anticipated future growth into current period prices and, therefore, market capitalization.

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.

Types of capital market

Primary market

According to Soyede (2005: 8) 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.

Secondary market

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 (2006:4), 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)

Stock Price Behavior

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.

Efficient Capital Market:

An efficient capital market is one where the stock/security price reflects all information related to it. The information is of utmost importance to all the active participants/investors (in secondary market) to make their investment decision whether it is purchasable of new shares or sale of existing holdings. Security prices are more stable because of the operation of the security market. They improve liquidity by providing continuous markets that make a more frequent but smaller price change. An efficient market is one where the current price security (share/stock) gives the best estimate of its true worth. It is not possible to systematically gain of loss abnormal profits on the basis of available public information. In such an efficient market, the prices of securities reflect investors' estimates of level of return and risk in future cash flows. The higher securities that are priced efficiently guide the financial market allocating funds to the most productive use.

There are three theories of price behaviour i.e. Conventional Approach, Efficient Market Theory, Random Walk Theory. Conventional approach includes fundamental analysis theory and technical analysis theory. Under efficient theories, there are three forms of efficient market hypothesis. Conventional approach

The classical or conventional approach includes fundamental analysis and technical analysis theory. Fundamental analysis or approach forecast stock price on the basis of earning and dividend of the company. The fundamental analysis theory holds that the market value of a share is based on certain intrinsic or fundamental factors such as the earnings, dividends, growth potential, debt equity mix etc. where as technical analysis theory talks about the stock prices on the basis of past price behaviour of the company, which suggests that by plotting the market price of shares over a period of time on a chart, that can determine certain patterns.

i) Fundamental Analysis

Fundamental analysis involves making investment decision based on the examination of the economy, an industry, and company variables that lead to an estimate of value for an investment, which is then compared to the prevailing market price of the investment ( Frank K. Reilly & Keith C. Brown, 2000:869-70).

ii) Technical Analysis

Technical analysis involves the study of stock market prices in an attempt to predict future price movements. Past prices are examined to identify recurring trends of patterns in price movements. Then more recent stock price is analyzed to identify emerging trends or patterns that are similar to past ones. This analysis is done in the belief that these trends or patterns repeat themselves. By identifying an emerging trend or pattern, the analyst hopes to predict accurately future price movement for a particular stock (Sharpe, Alexender and Balliey, 1999: 347 cited by Giri, 2010).

Technical analysis is based on the widely accepted premise that security prices are determined by the supply and the demand for securities. The tools of technical analysis are therefore designed to measure certain aspects of supply and demand (Francis, 1991: 521-22). The technical analyst usually attempts to predict short term price movement and thus makes recommendation concerning the timing of purchase and sales of either specific stock or group of stock (such as industries) or stock in general.

Technical analysis involves the study of stock market prices in an attempt to predict future price movements. Past prices are examined to identify recurring trends or patterns in price movements. Then more recent stock prices are analyzed to identify emerging trends or patterns that are similar to past ones. This analysis is done in the belief that these trends or patterns repeat themselves. By identifying an emerging trend or pattern, the analyst hopes to predict accurately future price movements for a particular stock (Gordon J. Alexander, Willam F. Sharpe, & Jefery V. Bailey, 2001:12).

It is sometimes said that fundamental analysis is designed to answer the question 'what' and technical analysts seems to forecast 'when' (Fisher and Gordon, 2000 cited by Giri, 2010)


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.

Weak efficiency

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.

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.

Semi strong efficiency

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.

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.

Strong efficiency

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.

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. From Capital market as a veritable source of development in

Nigeria economy

Random Walk Theory

In 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 the theory, stock price changes have the same distribution and are independent of each other, so the past movement or trend of a stock price or market cannot be used to predict its future movement.

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. Critics of the theory, however, contend that stocks do maintain price trends over time - in other words, that it is possible to outperform the market by carefully selecting entry and exit points for equity investments.

Random walk theory describes whether past prices can predict future. "Random walk theory implies the future path of price level of a security is no more predictable than the path of series of cumulated random numbers. The series of price changes has no memory; that is, the past cannot be used to predict the future in any meaningful way." It means that the current size and direction of price changes is independent and unbiased outcome of previous price changes. The random walk model in share prices actually involves two main hypotheses:

Successive price changes are independent.

The price changes confirm to some probability distribution (Fama, 1996: 34-35).

Theoretically, in the presence of the efficient capital market the stock prices incorporate all the public and private information, and nobody can outperform the market. But, in practice, the use of technical and fundamental analysis is helpful to excel the market performance. Based on the evidences of previous studies that intangible returns reversal is possible and the book-to-market is the good proxy of intangible returns (Daniel and Titman, 2006).

Theories of Stock Market predictions

When predicting the future of stock market securities, there are 2 important theories available. The first one is EMH introduced by FAMA 1964) and the second one is Random Walk Theory (Malkiel 1996). The following sections gives the distinction between these two common theories.


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). Fama's theory breaks EMH into three forms, Weak, Semi Strong and strong (Schumaker and Chen, 2006).

In weak EHM, only past price and historical information is embedded in the current price. This kind of EMH rules out any form of predictions based on the price data only, since the price follows a random walk in which successive changes have zero correlation. The semi strong form goes a step further by incorporating all historical data and currently public information into the price. This includes additional trading information such as volume data, and fundamental data such as profit prognoses and sales forecast. The strong form includes historical, public and private information suchas insider information, in the share price.

The weak and semi strong form of EMH ahs been fairly support in a manner of research studies (…)but in recent years many publishers reports show that EMH strong form is far from correct.

Random Walk Theory:

A different perspective on prediction comes from RWT. In this theory, stock market prediction is belived to be impossible where prices are determined randomly and outperforming the market is infeasible. Random Walk theiry has similar theoretical underpinning to semi strong EMH where all public information is assumned to be available toeveryone. However, RWT declears that even woth 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:

The term technical analysis denotes a basic approach to stock investing where the past prices are studied, using charts as the primary tool. It is based on mining rules and patterns from the past prices of stocks which is called mining of financial time series. The basic prini=ciples include concepts such as the trading nature of prices, confirmation and divergence, and the effect of traded volume. Many hundreds of methods for predicting of stock price have been developed and sre still being developed on ht egrounds of these basic principles( Hellmstong and Holmstrom, 1998 cited by…)

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 (…)

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. The lag time between and eent and its resulting maret response presents a trading opportunity. Fundamental analysis is based on economic data of companies and tries to forcast markets using economis data that companies have to publish regularly, i.e. annual and quarterly reports, auditors' reports, balance sheet, income statement etc.news has an importace for investors using fundamental analysis because news describes factors that may affect supply and demand.

In the fundamentalist trading philosophy, the price of a security can be deternibed 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).


(Pegah Falinouss, 2007)

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)

The prominent issues in the stock market might be the fluctuating stock market indices, the capital centric trading su=ystem, limited number of dominant investors, and their influences in stock market. Kafle(2007) stated that the stock market is bullish and getting to new peaks, there are numbers of contriduting factors out of them investors' awareness on the risk return and investment profile is the one. The major task of the securities regulating authorities is to protect investors' right and to provide the congenial trading environment with confidence and commitment. The development and expansion of the current infrastructure and the facilities is the another aspect. There is no the practice that regulators provides the specific investment advice, regulators ahould not recommend the purchase or sale of particular stocks. Similarly they should not provide strategies to guide investors' investment decisions. But the authority can do well and compel to do others is to disseminate the timely and reliable information that can enhance the awareness level of the investment communities.

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.

The most influencing factors for financial decisions are in order of importance -corporate earnings, get rich quickly and stock marketability, past performance of firms' stock government holdings and creation of organized financial markets Al- Tamimi(2006).

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).

Investor awareness is crucial for the investment decision making and sustainable growth of capital market. The result of the study depicted that equity investors are aware and their level of awareness is high compared to desired level. Th efindings of the study is that fully aware equity investors have more chances of holding high volume of equity investment. In other word, there is positive correlation between awareness and level of investment. Nepalese capital marlet ois characteristized with limited sources of information. The rational fact os that investors need to have good access to market information but the study shows that there is problem on access to information for equity investors in secondary market. Equity investors with higher investment have more knowledge/ aware in investment than those with lower investment. Equity investors wioth higher educational background have more investment than those with lower level of education. Mass investors in secondary market experiences that existing sources of information are not sufficient and realized the need of advertisement. Similarly majority of them believe that existing brokerage firms are not sufficient to meet the market needs and think the need of new stock exchange. Sudarshan Kadariya, Phul Prasad Subedi, Bharati Joshi, Ram Prasad Nyaupane (2012).

In terms of the investment in financial assets like common stocks, bonds, options, futures, etc, the tangible and intangible variables (Kadariya,2012) play the important roles in decision making. greater information uncertainty produce relatively higher expected returns (Zhang, 2006) and the media coverage has been the significant factor for stock return forecasting, the evidences documented by Fang and Peress (2009) showed that high-media coverage stocks earn lower returns and Engelberg and Parsons (2011) revealed that the presence or absence of local media coverage is strongly related to the probability and magnitude of local trading. These evidences give some insight that there are some dimensions in the stock prices that have been consistently providing information about the future movements and it is important to determine. Apart from the voluminous studies in the developed and western economy, limited studies has been conducted in Nepalese context. Some of the major studies indicates: the positive relation between stock returns and size where as inverse relation between returns and market-to-book value; the positive relation of stock returns with earning yield and size whereas negative relation with book-to-market ratio and cash flow yield and book-to-market value is found to be more informative; book-to-market equity is the most significant determinant of stock returns and in other study, the evidence shows that Nepalese stock market is inefficient (Kadariya, 2012)

According to kadariya (2012) that the market reactions to tangible information and intangible information in Nepalses Stock Market ahs shows that younger generation with higher education background has been actively involved in Nepalese Capital Market. He further explains, Banking and financial sector remained the most popular investment sector among Nepalese investors and majority of them prefer capital gain rather than the usual cash dividend and seasonal issues.



Research methodology is a way to solve the research problem systematically. Methodology is the research method used to test the hypothesis. It refers to the various sequential steps that are to be adopted by a researcher during the course of studying a problem with certain objectives. It describes the methods and process applied in the entire aspects of the study. 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" (Selltiz 1962 cited by Shrestha,2010).

The research design of this study is descriptive and analytical in nature. This study includes both qualitative and quantitative data have extensively been employed. To facilitate research, the researcher collects the data of concerned sampled companies and they are tabulated and analyzed by using different financial and statistical tools to find out real condition resource utilization.

Population and Sample Studies

In the FY( Fiscal Year) 2010/2011, with the listing of 33 new companies, merged of two companies 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 2009/2010 (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 represents4.35 percent of the population.

Sector wise listed company, Population, Sample Studies, Study Years and Number of Observations of Different Sector

Source: SEBON 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

The research uses both primary and secondary data from 2006/07 to 2010/11 are analyses. For different objectives different sets of historical data has been obtain from World Bank, SEBON, NEPSE and sampled companies Annual Report. 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 used.

Top of that 100 close ended questionnaires and 15 open ended questionnaire are distributed. Primary data has been transferred to SPSS.

All the collected data and information have been properly arranged, synthesized, tabulated and calculated to arrive at the realistic analytical steps.

Tools for Analysis

Objectives 1

The following model has been used to work out and to analyzed the capital market development.

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 pro

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