Determinants of stock prices Essay Example

ACF306 – BUSINESS RESEARCH

Research Paper Proposal Form

Topic: Determinants of stock prices

Research Aim: To examine factors that determine the share prices.

Research Objective:

• To identify factors, that influences the price of stock in the stock market.

Research Question:

• Are there factors that affect the price of stock in the equity markets?

Research Hypothesis:

• The price of stock in the equity markets is dependent on some factors.

• The price of stock is not independent.

• Some quantitative factors of a firm influence the stock prices in the stock markets

Preliminary Reading List:

Armstrong, J. Scott (2012), «Illusions in Regression Analysis.» International Journal of Forecasting (forthcoming) 28 (3): 689.doi:10.1016/j.ijforecast.2012.02.001.

Al-Qenae, Rashid; Li, Carmen; Wearing, Bob 2002, “The Information Co Earnings on Stock Prices: The Kuwait Stock Exchange, Multinational Finance Journal, 6(3&4), 197-221

Docking, Diane S.; Koch, Paul D. 2005, “Sensitivity of Investor Reaction to Market Direction and Volatility: Dividend Change Announcements,” Journal of Financial Research, 28 (1), 21-41.

Dimitrios Tsoukalas 2003, “Macroeconomic Factors and Stock Prices in the Emerging Cypriot Equity Market,” Managerial Finance, 29(4), 87-92.

Hartono, Jogiyanto. 2004, “The Regency Effect of Accounting Information,” Gadjah Mada International Journal of Business, Vol. 6 No.1, p 85-116.

Kurihara, Utaka, 2006, “The Relationship between Exchange Rate and Stock Prices during the Quantitative Easing Policy in Japan”, International Journal of Business, Vol. 11, No.4: 375-386

Mansor H. 2003, “Macroeconomic Forces and Capital Market Integration: AVAR Analysis for Malaysia,” Journal of the Asia Pacific Economy, 8 (1), 19-40

Ralph I. Udegbunam and P.O. Eriki 2001, “Inflation and Stock Price Behavior: Evidence from Nigerian stock market,” Journal of Financial Management & Analysis, Vol. XX, No. 14(1):1-10.

Research Methodology:

The methodology will give a guide to data collection, analyzing the data, interpreting and eventually to prepare a report in line with the objective of the study, Docking, Diane, Koch and Paul (2005). The research will be a quantitative research. According to Hoy (2010), this kind of the investigation entails collection of data and conducting an analysis to establish relationships among variables.

1. Data and Sample Selection

To determine the factors that influence the stock price, the research will collect primary and secondary data. According to Nicholson et al. (2009), the primary data is preferred for research since the findings can be customized. Primary data will be collected from 50 investors who participate in stocks business by using structured questionnaire. The study will make use of five-point Likert scale to analyze the obtained data. The research will use five companies as a sample, namely Aberdeen Asset Management, Barclays, Compass Group, Diageo, and EasyJet.

Secondary data will be collected from the library of London Stock Exchange (LSE) and annual reports of the sample companies.

2. Specification of Variables

I. Dependent Variable:

• The share price (MP): Closing market price per share.

II. Independent Variables:

• Leverage: the leverage will be expressed as the Debt-Equity Ratio (DER). This is the capital structure of the firm. The research will determine the level of debt to equity ratio and the effects on the price of the stock.

DER = Total debt

Total shareholders’ equity

• Liquidity: will be measured by Quick Ratio (QR). This is the ability of the firm to meet its short-term financial obligations when they fall due. The research will establish whether there exists a relationship between liquidity and the price of the stock in the market.

QR = Current assets – Inventory

Current liabilities

• Profitability: will involve Return on Investment (ROI). The research will use ROI as a measure of profitability and evaluate the relationship between the stock prices.

ROI = (Gain from investment – Cost of investment)

Cost of investment

3. Data Analysis

The research will use regression analysis to estimate relationships between dependent and independent variables. According to Scott (2012) evaluates the changes in the dependent variable due to a change in the independent variable holding other variables constant. The research will establish a specific relationship of independent variables to dependent variables. The study will use a parabola since the regression has more than one independent variable.

MP = β0 + β1 DER + β2 QR¬¬ + β3 ROI

Once the model is constructed, the parameters will undergo an evaluation to test statistical significance by F-test and eventually a t-test of each independent variable. Hypothesis testing will then be conducted to ascertain the relationship of the variables to the stock price.

Research Plan:

Timetable

Activities

Research proposal

Literature review

Preliminary field work

Preliminary research

Collecting data on questionnaire

Library research

Data analysis

Proposal writing

Publications

Proposal submission

W – Week

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