Impact of fundamental factors on stock price: A case of Nepalese commercial banks

Prof. Dr. Radhe S. Pradhan and Laxmi Paudel

Abstract
This study examines the impact of fundamental factors on stock price of Nepalese commercial
banks. Return on assets, return on equity, net profit margin, earning per share and dividend per
share are the independent variables. And market price per share and change in market price per
share are the dependent variables. Data are collected from the Banking and Financial Statistics
and Bank Supervision Report published by Nepal Rastra Bank and annual reports of the selected
commercial banks. The study is based on 13 commercial banks of Nepal from 2007 to 2014,
leading to a total of 104 observations. The regression models are estimated to test the
significance and impact of fundamental factors in stock price of Nepalese commercial banks.
The result shows that dividend per share (DPS), return on assets (ROA) and earning per share
(EPS) arepositively related to the stock price (market price per share and change in market price
per share). This indicates that higher the DPS, ROA and EPS,higher would be the stock price.
However, net profit margin is negatively related to stock price. The regression result shows that
the beta coefficients for DPS and EPS are positively significant with market price per share at 5
percent level of significance.

Key Words:Dividend per share, earning per share, performance, market price per share and
change in market price per share.
1. Introduction
Fundamental analysis is a method of evaluating a security performance by measuring its intrinsic
value through examining financial, qualitative, quantitative factors, and other related economic
factors.It is a study to learn any related factors that can affect the security’s value, including
individual specific factors and macroeconomic factors.Sharma and Singh(2006) revealed that by
understanding the factors that influence share prices leads to make sound financial decisions and
formulate policies related to dividend payment and rights issues. It further helpsinvestors to
make sound investment decisions in the stock market.
Financial market plays a crucial role in mobilization of a constant flow of saving and changing
these financial resources for expandingproductivecapacityin the countries.Sukhija (2014) argued
that due to liberalization, privatization and globalization stock, market has observed a lot of
changes in the last few years. As a result, the virtual magnitude of the factors influencing the
share prices has undergone some other type of changes. Financial market can be defined as the
center or arrangement that providefacilitiesforbuyingandselling of financial claims and services.
The market price of a share is a key factor that influence investment decision of stock market.
The share price is one of the most important indicators available to the investors for their
decision to invest or not in a particular stock (Gill & Mathur, 2012). Sundaram & Rajesh (2016)
documented that market price of the share is one the most important factor which affects
investment decision of investors but market price of the share depends upon many factors, such

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Electronic copy available at: https://ssrn.com/abstract=3044108

as earnings per share, dividend per share, dividend payout ratio, size of the firm,dividend yield,
management and diversification, etc.
Kurihara (2006) found that stock markets are essential for economic growth as they ensure the
flow of resources to the most productive investment opportunities. Stock is the evidence of
ownership after investor has invested certain amount of money to a company. In the context of
stock markets, prominent financial economists have developed a number of concepts which are
known to be essential prerequisites for fulfilling their economic roles.Kadariya(2012) explained
that mostly used methods for investment in capital market are fundamental analysis, market
noise, media and informal talks. Dividend, earning, number of equity and book to market ratio
are considered as top five important factor for investment decision as per the opinion of
individual stock investor.
Tease (1993) stated that the stock market plays a significant role in the economy of a country and
important role in the allocation of resources, both directly as a source of funds and as a
determinant of firms' value and its borrowing capacity. It works as an intermediary between
savers and companies seeking additional financing for business expansion. It provides a platform
to individuals, governments, firms and organizations to trade and invest through the purchase of
shares. A stock market is very crucial to sustainable economic growth as it can assure the flow of
resources to the most productive investment opportunities.
The stock price in the market is not static rather it changes every day. According to Gompers et
al. (2003), in the securities market, whether the primary or the secondary, stock price can be
significantly influenced by a number of micro environmental factors including dividend per
share, book value (asset value) of the firm, earnings per share, price earnings ratio and dividend
cover etc.
The key function of the stock market is to provide an exchange in which buyers and sellers
interact for the purpose of trading shares and other securities issued by publicly traded
companies (Monther & Kaothar, 2010).The micro economic factor also known as company
fundamental factor such as company performance, top management changes, and creating new
assets, dividends, earnings, etc are also responsible for change in price of the stock. Company
fundamental factors are determined by financial ratios derived from company financial
statements. Ebrahimi(2011) revealed that earning per share, return on assets, net profit margin,
basic earning power, price earning ratio, dividend payout ratio, earning and beta has a significant
effect on stock price.
Uddin & Rahman(2013)observed that EPS has the highest impact on the stock price of the
companies.Khan & Aamir(2011) foundthat there is positive relationship of earnings per share,
profit after tax and return on equity with stock price.Hatta & Dwiyanto (2009) documented that
stakeholders are required to consider the earning per share in deciding whether to buy or sell
their stocks.Srinivasan (2012) revealed thatearnings per share and price-earnings ratio are being
the crucial determinants of share prices.Sharma (2011) suggested that firm specific factors have
significant impact on the market price of the share.
The recent studies have found the positive relationship between fundamental factors and stock
price of commercial banks in India (Challa & Chalam, 2015). Sukhija(2014) revealed that
dividend per share and price earning ratio has a positive and significant impact on the share
prices. Sundaram & Rajesh (2016) assessed the effect of fundamental factors on the stock price

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Electronic copy available at: https://ssrn.com/abstract=3044108

of commercial banks in India and found that stock price is affected by fundamental factors.
Ozlen (2014), Astutik et al.(2014), Sharif et al.(2015) and Almumani(2014)stated that there is
positive association between fundamental factors and stock price.

In the context of Nepal, Bhattarai(2014)found that dividends, earnings and book-to-market ratio
are the factors that influence stock price of Nepalese commercial banks. Amatya(2016) found
that there is positive relationship between market price per share and return on assets, dividend
per share, earning per share, price earning ratio and gross domestic product.Pradhan &
Dahal(2016)found thatearning per share, price earnings ratio, book value per share and return on
assets has very weak effect in market price per share.Sapkota (2014)found that earning per share,
dividend per share, price earning ratio, return on assets and gross domestic product had
significant impact with market price per share. Lama (2016) found that market price per share is
positively correlatedto size, earning per share, dividend per share, return on assets, money
supply, inflation and gross domestic product. Ban et al. (2016) found that market price per
shareis positively related to bank specific variables such as earning per share, return on assets
and return on equity.
The purpose of this study is to investigate the impact of fundamental factorson stock price of
Nepalese commercial banks. More specifically, it examines the impact ofreturn on assets, return
on equity, net profit margin, earning per share and dividend per share on stock price of Nepalese
commercial banks.
The remainder of this study is organized as follows: Section two describes the data and
methodology. Section three presents the empirical results and final section draws conclusions
and discusses the implications of the study findings.
2. Methodological aspects
This study is based on the secondary data that have been collected from Banking and Financial
Statistics and Bank Supervision Report published by Nepal Rastra Bank and annual reports of
the selected 13 commercial banksfrom fiscal year 2007 to 2014, leading to a total of 104
observations. Table 1 shows the number of commercial banks selected for the study along with
the study period and number of observations.
Table 1
List of banks selected for the study along with the study period and number of observations
S. No. Bank Study Period Observation
1 Standard Charted Bank 2007/08-2014/15 8
2 Everest Bank 2007/08-2014/15 8
3 Nabil Bank 2007/08-2014/15 8
4 Nepal SBI Bank 2007/08-2014/15 8
5 Nepal Bangladesh Bank 2007/08-2014/15 8
6 Himalayan Bank 2007/08-2014/15 8

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 7 Bank of Kathmandu 2007/08-2014/15 8
8 Laxmi Bank 2007/08-2014/15 8
9 Nepal Credit and Commerce Bank 2007/08-2014/15 8
10 Machhapuchhre Bank 2007/08-2014/15 8
11 Nepal Investment Bank 2007/08-2014/15 8
12 Kumari Bank 2007/08-2014/15 8
13 Siddhartha Bank 2007/08-2014/15 8
Total 104

Thus, the study is based on 104 observations.

The model
As a first approximation, the model estimated in this study assumes that the stock price depends
on several independent variables. The independent variables are return on assets, return on
equity, net profit margin earning per share and dividend per share. Therefore, the model takes the
following forms:
Stock price= f (ROE, ROA, NPM, DPS, EPS)
More specifically, the given model has been segmented into following models:
Model 1:
MPSit = β0 + β1ROAit + β2ROEit + β3NPMit+ β4 EPSit + β5 DPSit + eit
Model 2:
MPSit = β0 + β1ROAit + β2ROEit + β3NPMit+ β4 EPSit + β5 DPSit + eit
Where,
β0= constant term, ROA= Return on assets defined as the percentage of net profit to total assets,
ROE= Return on equity defined as percentage of net profit to equity shares, NPM= Net profit
margin defined as percentage of net profits to revenues for a company, DPS= Dividend per share
defined as the ratio of dividend paid to number of shares outstanding in Rupees and EPS=
Earning per share defined as ratio of net income after tax to number of shares outstanding in
Rupees, MPS= Market price per share defined as closing price of stock at the end of the financial
year of the bank in Rupees, MPS= change in market price per share defined as the difference
between closing price of current year stock and previous year stock in Rupees andeit= the error
term.
Market price (MPS)
Khanna & Zahir(1982) stated that the market price of the share is mainly determined by the
forces of demand and supply of a particular security in the market. Daily price fluctuations arise
because of changes in the buying and selling pressure. Due to these fluctuations it becomes

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difficult to decide as to which market price should be regressed as a measure of dependent
variable. In the present study closing price of stock at the end of the financial year of the bank
has been taken to represent market price. The market price is used as dependent variable in the
present study.
Earning per share (EPS)
EPS represents the capability of a company in making profit for each stock owned by
stakeholder. The increasing earning per share generally indicates the growth of a company and
resulting in high market price. Uddin & Rahman(2013) revealed a positive linear relationship
between earning per share and market stock price. Malhotra & Tandon (2013) found that
earnings per share has a positive relationship with market price, that is, higher the earning per
share, higher would be the market price per share. Based on it, this study develops the following
hypothesis:
H1: There is a positive relationship between earnings per share and share price.
Dividend per share (DPS)
Khanna & Zahir(1982) determined that dividend is the portion of the profit after taxes which are
distributed to the share- holders for their investment and bearing risk in the company. The study
found positive relationship between dividend per share and market stock price. Chaudhary &
Mohammed(2002) revealed that the dividends generally influence the share price in a positive
direction. The dividend rate of a company has a significant influence on the market price of a
share. Based on it, this study develops the following hypothesis:
H2: There is positive relationship between dividend per share and share price.
Net profit margin (NPM)
Net profit margin (NPM) is the ratio of net profits to revenues for a company. This ratio shows
cost-effective operational activities of a company. Hatta & Dwiyanto (2009)revealed that NPM
has negative and significant effects on stock price, improvement in these variables will decrease
stock price. Uddin & Rahman (2013) concluded that NPM is strong determining factors for price
of shares in stock market. The study found positive relationship between NPM and MPS Based
on it, this study develops the following hypothesis:
H3: There is positive relationship between net profit margin and share price.
Return on assets (ROA)
ROA indicates the capability of a company to utilize its assets to generate net profit. Idawati &
Wahyudi (2015)showed a positive relationship between ROA and stock price. Kabajeh &
Nuaimat(2012) indicated that EPS and ROA have positive and significant relationship with stock
price. Based on it, this study develops the following hypothesis:
H4: There is positive relationship between return on assets and share price.
Return on equity (ROE)
Return on equity (ROE) explains how many dollars of profit a company generates with each
dollar of shareholders' equity. Subiyantoro & Andreani(2003) evidenced that stock price is

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influenced by return on equity. Astutik et al(2014) revealed that ROE have a positive effect on
stock prices. The potential investors prefer companies that provide high returns than investing in
low return. Based on it, this study develops the following hypothesis:
H5: There is positive relationship between return on equity and share price.
3. Result and discussion
Descriptive statistics
Table 2 shows the descriptive statistics of the selected variables. The average MPS of the banks
during the study period is noticed to be Rs. 1139.23 with a minimum price of Rs. 100 and
maximum price of Rs.6380 while, the change in market price per share ranges from Rs. -2150 to
Rs. 930 with an average of Rs 114.94.
Table 2: Descriptive statistics
The descriptive statistics is shown for dependent and independent variables. Dependent variables are
market price per (MPS) defined as closing price of stock at the end of the financial year of the bank in
Rupees and change in market price per share (MPS) defined as the difference between closing price of
current year stock and previous year stock in Rupees. And the independent variables are return on assets
(ROA) defined as the percentage of net profit to total assets, return on equity (ROE) defined as
percentage of net profit to equity shares and net profit margin (NPM) defined as percentage of net profits
to revenues for a company, dividend per share (DPS) defined as the ratio of dividend paid to number of
shares outstanding in Rupees and earning per share (EPS) defined as ratio of net income after tax to
number of shares outstanding in Rupees.
Variables N Minimum Maximum Mean Std. Deviation
MPS 104 100 6380 1139.2 1193.97
 MPS 104 -2150 930 114.94 1167.05
ROE 104 -6.14 194.03 32.58 62.03
EPS 104 -18.27 131.92 42.95 29.63
NPM 104 0 51.31 28.579 71
ROA 104 0 8.15 2.23 97.86
DPS 104 0 86.6 22.74 22.49
The return on equity of selected bank varies from minimum of -6.14 percent to maximum of
194.03 percent with an average of 32.58 percent. The earning per share has a minimum value of
Rs. -18.27 and maximum value of Rs. 131.92, with a mean of Rs. 42.95. Net profit margin
ranges from 0 percent to 51.31 percent having an average of 28.579 percent. Likewise, return on
assets has a minimum value of 0 percent and maximum value of 8.15 percent, leading to the
average of 2.23 percent. Similarly, dividend per share is noticed to be Rs. 22.74 with a minimum
of Rs. 0 to maximum value of Rs. 86.6.
Correlation analysis
Having indicated descriptive statistics, the Pearson’s correlation coefficients have been
computed and results are presented in Table 3.
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 Table 3: Computation of Pearson's coefficients of correlations for dependent and
independent variables
This table presents the bivariate Pearson correlation coefficients between dependent and independent
variables. Dependent variables are market price per (MPS) defined as closing price of stock at the end of
the financial year of the bank in Rupees and change in market price per share (MPS) defined as the
difference between closing price of current year stock and previous year stock in Rupees. And the
independent variables are return on assets (ROA) defined as the percentage of net profit to total assets,
return on equity (ROE) defined as percentage of net profit to equity shares and net profit margin (NPM)
defined as percentage of net profits to revenues for a company, dividend per share (DPS) defined as the
ratio of dividend paid to number of shares outstanding in Rupees and earning per share (EPS) defined as
ratio of net income after tax to number of shares outstanding in Rupees.
Variables MPS MPS ROA ROE EPS NPM DPS
MPS 1
MPS 0.082 1
ROA 0.034** 0.226* 1
ROE -0.019* 0.025 0.099 1
EPS 0.759** 0.015** 0.021** 0.338** 1
NPM -0.1 -0.773 -0.009 0.078 -0.025 1
DPS 0.793** 0.746** 0.087 -0.067 0.794** -0.019 1
Note: **. Correlation is significant at the 0.01 level (2 tailed).
*. Correlation is significant at the 0.05 level (2-tailed).

Table 3 shows that there is a negative relation between return on equity and market price per
share which revealed that higher the return on equity, lower would be the market price per share.
Likewise, earning per share has positive relationship with return on assets. It indicates that higher
the earning per share, higher would be the market price per share. Likewise, net profit margin
has negative relationship with market price per share showing that higher the net profit margin,
lower would be market price per share.

The result shows that there is a positive relation between return on assets and change in market
price per share which indicates that higher the return on assets, higher would be change in
market price per share. Similarly, there is positive relationship between return on equity and
change in market price per share which revealed that higher the return on equity, higher would
be the change in market price per share. Likewise, earning per share has positive relationship
with change in market price per share. It indicates that higher the earning per share, higher would
be the change in market price per share. Likewise, net profit margin has negative relationship
with change in market price per share showing that higher the net profit margin, lower would be
change in market price per share.
Regression analysis

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Having indicated the Pearson correlation coefficients, regression analysis has been conducted
and the results are presented in Table 4. More specifically, it shows the regression results of
market price per share.
Table 4: Estimated regression results of ROA, ROE, NPM, DPS and EPS on MPS
The results are based on panel data of 13 commercial banks with 102 observations for the period of 2008
to 2015 by using linear regression model. Dependent variable is market price per (MPS) defined as
closing price of stock at the end of the financial year of the bank in Rupees. And the independent
variables are return on assets (ROA) defined as the percentage of net profit to total assets, return on
equity (ROE) defined as percentage of net profit to equity shares and net profit margin (NPM) defined as
percentage of net profits to revenues for a company, dividend per share (DPS) defined as the ratio of
dividend paid to number of shares outstanding in Rupees and earning per share (EPS) defined as ratio of
net income after tax to number of shares outstanding in Rupees.The model is: MPS = β0 + β 1ROAit + β
2ROEit + β 3NPMit + β 4DPSit +β5EPSit +Error.
Models Intercept Regression Coefficients Adj R2 SEE F

ROA ROE NPM EPS DPS

1 1060.69 10.42 0.09 2431.74 0.021

(5.58)** (0.14)

2 1097.45 -41.088 0.01 1199 0.116

(10.46)** (-0.340)

3 1153.57 -16.8 0.01 1193.8 1.027

(9.783)** (1.013)

4 -174.688 30.58 0.57 781.02 18.7

(-1.291) (11.77)**

5 55.548 42.088 0.62 731.32 172.54

(0.508) (13.135)**

6 7.77 2002.77 42.21 0.63 733.79 85.85

(0.056) (0.561) (13.1)**

7 -159.53 -0.136 30.51 0.58 778.78 70.55

(-1.178) (-1.26) (11.76)**

8 -156.68 -61.01 30.62 0.57 782.56 69.38

(-1.139) (-0.77) (11.77)**
9 1.076 2224.94 38.38 -0.146 42.279 0.62 732.5 43.665]
(-0.08)** (0.620) (0.515) (-1.436) (13.09)**
10 57.74 -1815 -26.61 34.81 0.65 704.1 65.39
(0.44) (4.97)** (-0.37) (13.99)**

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 11 51.807 42.689 -0.141 42.164 0.62 730.22 58.45
(0.454) (0.578) (- (13.126)**
1.397)*

12 -170.485 14.124 27.303 0.67 688.65 104.3

(-1.429) (3.746)** (5.495)**

Note: **. Correlation is significant at the 0.01 level (2 tailed).

*. Correlation is significant at the 0.05 level (2-tailed).

The result shows positive beta coefficient for earning per share, return on assets and dividend per
share. This indicates that higher the earning per share, higher would be the market price per
share. This finding is similar to the finding of Malhotra & Tandon (2013). Likewise, positive
beta coefficient for dividend per share postulates that higher the dividend per share, higher would
be the market price per share. This finding supports the finding of Zahir & Khanna (1982). The
study also revealed that the beta coefficient for return on assets is positive with market price per
share. This indicates that higher the return on assets higher would be the market price per share.
This finding supports the finding of Idawati & Wahyudi (2015). However, the beta coefficients
are significant for EPS and DPS at 5 percent level of significance.
The beta coefficients for net profit margin and return on equity are negative. It indicates that net
profit margin and return on equity does not explain variation in market price per share. The beta
coefficients are not significant at 5 percent level of significance for both the variables.
The regression result of fundamental factors on change in market price per share is presented in
Table 5.
Table 5: Estimated regression results of ROA, ROE, NPM, DPS and EPS on change in
MPS
The results are based on panel data of 13 commercial banks with 104 observations for the period of
2007/08 to 2014/15 by using linear regression model. The model is MPS = β0 + β 1ROAit + β 2ROEit
+ β 3NPMit + β 4DPSit +β5EPSit +Error. Change in market price per share (MPS) is the dependent
variable and calculated as the difference between closing price of current year stock and previous year
stock in Rupees. And the independent variables are return on assets (ROA) defined as the percentage of
net profit to total assets, return on equity (ROE) defined as percentage of net profit to equity shares and
net profit margin (NPM) defined as percentage of net profits to revenues for a company, dividend per
share (DPS) defined as the ratio of dividend paid to number of shares outstanding in Rupees and earning
per share (EPS) defined as ratio of net income after tax to number of shares outstanding in Rupees.
Models Intercept Regression Coefficients of Adj SEE F
R2
ROA ROE NPM EPS DPS

1 96.13 1222.58 0.042 1142.45 5.48

(0.856)* (2.341)*

2 111.57 29.64 0.09 1172.3 0.066

(0.94) (O.258)

3 114.94 -0.017 -0.010 1172.6 0.023

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 (1.0) (-0.151)

4 -12.35 33.885 0.594 743.69 151.64

(-0.168) (12.314)**

5 -20.44 44.94 0.552 780.9 128.05

(-0.264) (11.31)**

6 -19.409 -21580.2 44.6 0.691 648.78 116.14

(-0.302) (-5.74)** (14.67)**
7 -23.93 4108.11 44.98 0.553 779.86 64.832
(-0.309) (1.128) (10.858)**

8 95.531 12625.28 -0.057 0.035 1146.63 2.85

(0.847) (2.382)** (-0.507)

9 -19.41 -2158.29 44.60 0.69 648.78 116.14

(-0.30) (-5.75) (14.67)**

10 -32.66 89.01 -0.093 46.69 0..57 778.01 43.92

(-0.42) (1.16) (-1.22) (11.47)**

11 -39.906 -0.008 -0.130 22.296 24.267 0.678 662.32 73.267

(-0.606) (-0.42) (- (6.313)** (4.935)**
2.008)*

Note: **. Correlation is significant at the 0.01 level (2 tailed).

*. Correlation is significant at the 0.05 level (2-tailed).

The result shows positive beta coefficients for earning per share, return on assets, dividend per
share and return on equity. This indicates that higher the earning per share, higher would be the
change in market price per share. This finding is consistent with the finding of Sharma (2011).
Likewise, positive beta coefficient for dividend per share postulates that higher the dividend per
share, higher would be the change in market price per share. This finding supports the finding of
Sukhija (2014). The study also revealed that the beta coefficient for return on assets is positive
with change in market price per share. This indicates that higher the return on assets higher
would be the change in market price per share. This finding supports the finding of Idawati &
Wahyudi (2015). Similarly, positive beta coefficient for return on equity postulates that higher
the return on equity, higher would be the change in market price per share. However, the beta
coefficients are significant for EPS and DPS at 5 percent level of significance.
The beta coefficient for net profit margin is negative. It indicates that net profit margin does not
explain variation in change in market price per share. The beta coefficient is not significant at 5
percent level of significance.
4. Summary and conclusion
The share prices are the most important indicator readily available to the investors for their
decision to invest or not in a particular share. Theories suggest that share price changes are

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associated with changes in fundamental variables which are relevant for share valuation like
payout ratio, dividend yield, capital structure, earnings size of the firm and its growth. The
changes in stock prices and the trend of changes have always been of interest in the capital
market. Understanding why prices move up and down is of critical importance to investors and
there are various variables that drive stock prices. Both external and domestic factors have
affected stock market. The share price is one of the most important indicators available to the
investors for their decision to invest in or not a particular share.Investment in shares offers the
benefit of liquidity as well as the opportunity to beat the market and earn high returns. But the
task of predicting share prices is far from simple. Fundamental variables on share price are very
much helpful to investors as it will help them in taking profitable investment decisions.
The study aims at examining the impact of fundamental factors on the stock price of Nepalese
commercial banks. The study is based on secondary sources of data for 13 commercial banks
consisting of 104 observations from 2007 to 2014 in Nepal.
It has been found that ROA, EPS and DPShave positive relationship with market price per share
of banks. The beta coefficients are significant for DPS and EPS at 5 percent level of significance.
This indicates that increase in ROA, EPS and DPSleads to increase in market price per share of
the banks. The major conclusion of this study is that return on assets (ROA),earning per share
(EPS) and dividend per share (DPS) are the major factors affecting market price per share in
Nepalese commercial banks.
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