CHAPTER I

INTRODUCTION

1.1.Background of Study
This study examines the determinants of stock market of Nepalese commercial banks. The
study is based on the analysis of dependent and independent variables over the period
2011/12(2068/69) to 2016/17(2016/17). Market price has been selected as dependent
variables and the firm specific factors such as dividend per share, earning per share, book
value of share, and return on assets are chosen as independent variables. By studying the
factors that influence share price leads to make sound financial decision and formulate
policies related to dividend payment and right issue. It further helps investors to make
sound investment decisions in the stock market.

The financial sectors of any countryplays a pivotal in the development process of each
economy and economy depends on the growth of its financial sector. Financial market
playscrucial role in the mobilization of constant flowof saving and changing the financial
resources for expanding productive capacity in the country. The key role of financial
system is to minimize the problems of the asymmetric information, which argues because
borrowers generally knowmore about their investment projects than lenders. Financial
market is a place that facilitates financing and investment of financial assets(Jeff Modura,
2001). The financial market can be defined as rational process of transforming the funds
from savers to users to facilitate the efficient allocation and the growth of financing and
investment in the financial assets transformation to generate income to savers and users.

The history of modern financial system of Nepal was begun in 1937 with the establishment
of Nepal Bank Limited (NBL) as the first commercial bank of Nepal with the joint
ownership of the government and general public. This is the major milestone in the history
of Nepal as the country entered into the official financial system. After the nineteen years
of establishment of NBL, the Nepal Rastra Bank (NRB) was established in the year 1956
with the central banking responsibilities of guiding the development of the embryonic
domestic financial sector. After the establishment of NRB, Nepal witnessed a
systematicdevelopmentof financial system. In the initial year of operations, the NRB has
been focusing towardsmonetization of the economy by circulating Nepalese Currency all

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over thecountry. After achieving some progress it started taking initiation towards
institutional development. Rastriya Banijya and Agricultural Development Bank Ltd. were
established in the year 1966 and 1968 respectively. 47 years after the first bank established
in Nepal, the first privately owned commercial bank, Nabil Bank Limited, was established
in the year 1984.

According to the annual report of NRB 2016/17, Class ‘A’ commercial banks are 28, Class
‘B’ developmentbanks are 40, finance companies under Class‘C’ are 28 and 53
microfinance fall under Class‘D’. In addition, there are 14 cooperatives performing limited
banking transaction and 25 NGOs performing microfinance transactions.

The stock market plays an important role in the economic development by promoting
capital formation and raising economic growth. Trading of securities in the market
facilitates savers and users of capital by fundpooling, risk sharing and transferring wealth.
Investors take decisions to invest in particular share of companies, keeping in view their
share prices. Theories suggest that there is an association between changes in share price
and changes in financial fundamental variables. (Nisa & Nishat, 2011)

Fluctuation in stock prices may occur due to the supply and demand forces but there is no
foolproof or perfect system that indicates the exact movement of stock prices. The factors
behind the increase or decrease in the demandand supply of stock prices can be specific
firm factors or macroeconomic factors. Sundaram & Rajesh (2016) documented that
marketprice of the share is one of the most important factor whichaffects investment
decision of investors but market price of the share depends upon many factors, such as
earnings per share, dividend per share, dividend payout ratio, size of the firm, dividend
yield, management and diversification.

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 & Kaother, 2010). The firm specific factors such as company
performance, top management changes,creating new assets, dividends, earningsetc. are

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responsible forchanges in price of stock. The firm specific factors are determined by
financial statements.

In the context of Nepal, Bhattarai (2014) found that dividends, earning and book-to-market
ratio are the factors that influences stock price of Nepalese commercial banks. Lama (2016)
found that that market price per share is positively correlated to size, earnings per share,
dividend per share, return on assets, money supply, inflation and gross domestic product.

The present study is emphasis on some internal factors and also as well as on some external
factors. The focus of this paper is to investigate the determinants of stock prices in
commercial banking sector in Nepal. Understanding the impact of various fundamental
variables on share price is very much helpful to investors as it will help them in taking
profitable investment decisions.

1.2.Problem Statement and Research Questions

The problem toward which this study is directed is to identify the correlates of
determinants of share price of Nepalese commercial banks. The shares of commercial
banks play a vital role in the overall index of NEPSE and the overallindex is highly
influenced by the shares of the commercial banks. The sectorwise contribution in total
traded volume in NEPSE is mostly dominated by the financial sector. The shares of the
publicly quoted commercial banks seem to be the basis of investment to all potential
investors.

Only few investors of Nepalese share market are aware of the causing agent of share price.
It means that most of the investors are unknown about the financial performance of the
company but tends to invest on the company without proper financial analysis. It causes the
unusual relation of the financial indicators- EPS, BPS, DPS, etc. with the market price of
the share. Stock price is determined by demand and supply. Both the qualitative and
quantitative factors determine the stock price. However, to specify exactly what factors do
determine thestock is a controversial issue. The share price is the function of the several
factors. The stock price fluctuates time totime and stock exchange reacts with the

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environmental changes. However, for some environmental changes, the stock exchanges
have no effect. This study willtry to identify the determinants of stock price and find out
the degree ofaffection of those determinants. More specifically, this study is expected
toanswer the following research questions;

 What are the major determinants of stock price of Nepalese commercial Banks
listed in NEPSE?
 How earning per share (EPS) and book value per share (BVPS) affect the stock
price of Nepalese Commercial Banks?
 What is the effect of the dividend and return on assets on the stock price of
Nepalese Commercial Banks?

1.3.Objectives of the Study

Primarily, this thesis is intended for the partial fulfillment of the requirement of the degree
of MBS as demanded by the Faculty of Management., TU. Besides this, the general
objectives of this study are listed below:

 To identify the factors of share price fluctuation on Nepalese commercial banks.

 To examine and evaluate the relationship between MPS with the EPS and DPS of
the firm.
 To examine the effect of BVPS and ROA on MPS.

1.4.Significance of the Study

The study shows the impact of the firm specific variables and macro-economic variables on
the market price of share of Nepalese commercial banks. The study focuses on the stock
price movement of Nepalese commercials banks, so the study is particularly significant to
the investors, managers, bankers, stocks analysts, brokers, government officials,
academicians, students and any other stake holders who are interested in understanding the
share price behavior of Nepalese commercial banks.

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1.5.Organization of the Study
The study focuses on the investigation of the major determinants of the stock price of the
Nepalese commercial bank and their impact. With the intent of the above broad objectives
attainment, the study structure is presented in five chapters as follow:
Chapter I: Introduction
This chapter describes the basic concept and background of the study. It includes
information of the research area, problems of the study, objectives of the study, hypothesis
and significance of the study and limitation of the study.
Chapter II: Review of Literature
The second chapter of the study assures readers that they are familiar with important
research that has been carried out in similar areas. The study links in a chain of research
that is developing and emerging knowledge and review about concerned field.
Chapter III: Research Methodology
Research methodology refers to the various sequential steps to be adopted by a researcher
in studying a problem with certain objectives in view. It describes about the various sources
of fata related with study and various tools and techniques employed for presenting the
data.
Chapter IV: Data presentation and Analysis
This chapter analyses the data related to the study and presents the findings of the study
and also comments briefly on them.
Chapter V: Summary, Conclusions and Recommendations
This is the last chapter of the study. On the basis of the results from data analysis, the
researcher concludes the determinants of stock price of the sample bank for the investment
decisions.
The References, Bibliography and appendices have been included at the end of the study.

1.6.Limitations of the Study

The study is not comprehensive study. There are some limitations of the study. Lack of
experiences, time, and limited budget up-to-date information are the main limitation of the
study. Apart from this, some more limitations are presented as follows:

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 The subject is limited to determinants of stock price of Nepalese commercial
banks.
 The study covers only the past and the present state of stock market in Nepal,
hence does not make any prediction about the future.
 The study is based on the secondary data and limitations of using secondary data
may affect the result.
 Limited independent variables among various factors have been used for the
study.