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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.
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.
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?
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
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”
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)
Picture look at PC
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  , 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, ma
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