bstract

Share price is a reflection of a company’s performance and investors’ expectations about the future prospects of the firm. This study therefore investigates the determinants of deposit money banks’ share performance on the Nigerian stock market between 2005 and 2014. This was with a view to providing empirical analysis of the variables affecting deposit money banks share performance in Nigeria. Secondary data obtained from the Central Bank of Nigeria statistical bulletin, Nigeria Stock Exchange factbooks and annual financial statements of banks for the period under consideration were used for this study. The data were analysed using descriptive statistic and generalized linear latent and mixed model. The findings suggest that there is a positive relationship between share performance and EPS, loan-to-assets ratio and all-share index on one hand and a negative relationship between share performance and return on assets, inflation and tier-2 capital on the other hand. The study concludes that both micro and macro variables are statistically significant variables in determining banks’ share performance in Nigeria.

1. Introduction

Theories of finance and economic growth suggest that the financial functions provided by banks are important in promoting economic growth. Empirical research strongly supports the view that banks promote economic growth at the firm, industry and country levels (Cole, Moshirian & Wu, 2008). Thus, an effective banking system is a condition for a healthy economy and bank’s share is one of the factors that can reflect the effectiveness of the banking system (Ozsoz, Rengifo Akinkunmi, 2014). The performance of a bank can be represented by the performance of its share price as it is often a good indicator of how well the bank is doing (Shamsudin, Mahmood & Ismail, 2013). A share is the evidence of ownership after the investor has invested certain amount of money to a company (Almumani, 2014) and it reflects investors’ expectations about the future prospects of the firm. Findings from prior studies indicate that share price is a very much diverse and conflicting area of finance (Almumani, 2014). The determination of banks’ share price is often a matter of debate. It is a complex and conflicting task and has remained an open question (Francis, Hassan, Song & Yeung, 2012). Thus, identifying the factors that drive share performance has been a major concern for practice and academic research (Cauchie, Hoesli & Isakov, 2004).

In an efficient market, share performance has been observed to be determined primarily by economic fundamentals factors such as dividend yield, earnings per share, book-to-market value, price-earnings ratio, etc (Srinivasan, 2012; Yao, Yu, Zhang & Chen, 2011) and macroeconomic variables such as inflation, exchange rate, interest rate (Chiang & Chen, 2016; Fama & French, 1988). Fundamental analysis is the use of accounting information on firm fundamentals to derive a firm’s intrinsic value based on its earnings, dividends, investment opportunities, cost of capital and so forth (Hong & Wu, 2016). The principal aim of fundamental analysis is to improve the ability to forecast future movements in share performance, which can then be used to design investment strategies or optimal share portfolios (Avkiran & Morita, 2010). Whether share prices reflect fundamentals has been a contested issue already for several decades and this debate continues to persist (Velinov & Chen, 2015). During the 2007-2009 global financial crisis, shareholders of banks suffered extreme losses on their investment (Irresberger, Muhlnickel & Weib, 2015) and according to Ni, Wang & Xue (2015), unexpected slumps in the stock market could not be explained by mainstream classical financial theories, including the fundamental analysis and efficient-market hypothesis (EMH) (Fama, 1970), the asset pricing models such as Capital Asset Pricing Model (CAPM) (Sharpe, 1964), the macroeconomic factor model (Chen, Roll & Ross, 1986), and the three-factor model (Fama & French, 1993). There now exists ample empirical evidence that momentum variable is significantly correlated with firms’ share returns. Momentum analysis focuses on share’ own historical prices and returns (Teplova & Mikova, 2015). Price histories can indicate the psychology of the market better than fundamental factors and provide information regarding the sentiment of other participants in the market (Irresberger et al., 2015; Ni et al., 2015). Thus, information embedded in a share’ own past market prices should be useful alongside fundamental information for explaining share performance. Surprisingly, there has been little efforts understanding their complementary roles and there remain scant evidence on their joint ability to determine share performance across firms and over time (Hong & Wu, 2016). Although most of the above-mentioned variables have been empirically tested in explaining share performance in developed economies, not all of them have been applied to developing economies (Chiang & Chen, 2016). This is because the financial system of developing economies is somehow operating under a different set of rules and constraints (Rojas-Suarez, 2014).

Using Nigeria as an example, the country has been classified as a developing economy characterised by a lack of coherent legal and financial systems that provide sufficient information to accommodate investors, thin bond market, etc (Chiang & Chen, 2016). All of these facts create the need for further studies with an appropriate model that combine fundamental, momentum and macroeconomic variables together. This study therefore intends to fill this gap in literature by examining the determinants of share performance in Nigerian deposit money banks using three categories of economic sources which are domestic economic fundamentals, momentum analysis and macroeconomic variables. The rest of the project is organized as follows: Section 2 provides an overview of the relevant literature. Section 3 describes the data and empirical approach while Section 4 discusses the empirical results. Findings and conclusions are provided in Section 5.