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  A COMPARATIVE STUDY OF THE RELATIONSHIP
BETWEEN STOCK PRICE PERFORMANCE AND FIRM’S
               PROFITABILITY




              SUNDAY C. NWITE




             SENIOR LECTURER




    DEPARTMENT OF BANKING AND FINANCE
    EBONYI STATE UNIVERSITY – ABAKALIKI
2




                    PHONE NO: 080-37743134
             E-MAIL: nwitewhite2006@yahoo.com




                                  ABSTRACT
In Nigeria, there are many investors. Most of the investments are done on
stocks, equities, shares etc. investors prefer to invest in the area that has
better performance and profitability. In most cases, because of the volatility of
the market, they seek advise on the market, the annual report of such
companies for at least five years. There are a lot of attractions to invest. It is
one of the best ways of savings, and an idle fund is also a wasted fund and it
is also an avenue to have a seat on the board. The share certificates can
easily be converted into liquidity and also act as collaterals. This work
therefore wants to look at the relationship between the stock price
performance and their profitability. And it was found that such firm that make
more profits do therefore have a better performance of their stock prices.
Conclusion was drawn that that the stock price performance influences the
profit of the firm. Recommendations were made that investors should always
consult analyst of the stock market, professionals, stock brokers. They can
also seek information from other research professional bodies. This will help
3

them to understand companies that do well and the ones that are not doing
well so that they will know the one to invest.
KEYWORDS
Stock price, performance, profitability, collaterals, seat on the board.
PAPER TYPE: RESEARCH PAPER




                               INTRODUCTION
4

The capital market is the long-term financial market. It is made up of primary

and secondary market and institutions, which facilitate the issuance and

secondary trading of long-term financial instruments. The capital market

provides funds to industries and governments to meet their long-term capital

requirements, such as financing for fixed investments, etc. The Nigerian stock

exchange as a vision to promote capital formation in the country by providing

issuers and investors with a responsive, fair efficient stock market (Ahmed,

2008).

The Nigerian capital market (NCM) first came into existence in 1960 with the

establishment of the Lagos Stock Exchange.

Before the establishment of the Lagos Stock Exchange in 1960, almost all

formal savings and deposits went through the banking system while major

capital balance were invested for the country by the British on the London

Stock Exchange. The purpose of investment in stocks shares and equities is

to make profit by dividend payout or to increase the volume of the shares by

ploughing back the profit made.

In most cases, people prefer those companies that are doing well in the

Nigerian Capital Market. It is a believe that companies that are doing well will

make more profit all these are assumptions. The work wants to have a

comparative study on the relationship between stock prices and profitability of
5

the firm, to know whether such assumptions are true or not using published

data.


HISTORICAL DEVELOPMENT OF NIGERIAN CAPITAL MARKET

The beginning of the capital market in Nigerian can be traced to the country’s

colonial administration which in the 1946 established a 10 years plan for

Nigerian under which long-term funds were raised in the United Kingdom and

Nigeria for financing small community improvement project, educational

research and educational infrastructure and to induce private sector industrial

and agricultural development (Okereke, 2000).

Formal capital market activities in Nigeria came into existence with the

establishment of the Lagos Stock Exchange in March 1960 and in September

15, 1961, it commenced business before the establishment of the Lagos State

Exchange, almost all formal savings and deposits went through the banking

system while major capital balances were invested for the country by British

on the London Stock Exchange. The exchange started operations with 19

securities listed for trading. In an effort to accelerate the orderly growth of the

capital market in Nigeria, the federal government in 1962 established the

Capital Issue Committee. The committee was changed, inter-alia with the

responsibility of regulating the timing of public issues of securities. To further

strengthen the regulatory oversight of the capital issue committee was later
6

changed to Capital Issue Committee (CIC) under the Capital Issue Committee

Act (1973). In 1977 following the federal government review panel headed by

Dr. Pius Okigbo, the Lagos Stock Exchange was changed to Nigerian Stock

Exchange.

Following a comprehensive review of the Nigeria financial system in 1978, the

Securities and Exchange Commission (SEC) was established by the

promulgation of the SEC (1979). The Act was enacted at a time when the

indigenization exercise was in progress and the commission was saddled with

the responsibility of valuing the shares of enterprises.

There are other landmark events in the history of capital market among which

were the setting up of Adeosun and Okigbo panels, the inter-ministerial

communities, the review of companies and allied matters and the

indigenization decrees.

In 1996, the federal government set up a panel on the review of the Nigerian

capital market known as Oditte Panel. The panel submitted its report in

October, 1996 with recommendations to the federal government which were

the urgent need to mobilize the country for prosperity, to provide facilities for

capital mobilization and trading in the rural areas in form of capital trade points

(mini stock exchange) and the establishment of a technology driven national

exchange in Abuja to be known as the Abuja Stock Exchange (ASE) to
7

operate to international standards. Abuja Stock Exchange was incorporated as

a public liability company on June 17, 1999 and received its license to operate

as full fledged community exchange on August 1, 2000.

Other branches of stock exchange in Nigeria includes:

Kaduna, 1978; Port – Harcourt 1980; Kano 1989, Onitsha February 1990;

Ibadan August, 1990; Yola April 2002 and Benin 2005.


THE REASONS FOR THE EXISTENCE OF NIGERIAN CAPITAL

MARKET

The Nigerian capital markets just like its counterparts in other countries have a

lot of reasons to perform in other to ensure economic development; there are:

  1.    Provide an additional channel for engaging and mobilizing domestic

        savings for productive investment and represents an alternative to

        bank deposits, real estate investment and the financing of

        consumption loans.

  2.    Provides depositors with better protection against inflation and

        currency depreciation.

  3.    It fosters the growth of the domestic financial services sector and the

        various forms of institutional savings such as life insurance pension

        funds.
8

  4.    It improves the gearing of the domestic corporate sector and helps

        reduce dependence on borrowing.

  5.    It   improve the efficiency of capital and a market mechanism for

        management changes as compared with the administrative or political

        mechanism of public sector corporation.

  6.    To facilitate the transfer of enterprises from the public sector to the

        private sector.

  7.    To encourage privatization by increasing the marketability access to

        new issues.

  8.    Provide access to finance for new and smaller companies and

        encourage institutional development in facilitating the setting up of

        Nigeria’s domestic funds, foreign funds, and venture capital funds.


VARIOUS PRODUCTS SOLD IN THE FINANCIAL MARKET

According to Nwite (2005) financial market is where exchange of financial

resources takes place. That is a market where sellers and buyers of financial

resources come into contact. Thus, a financial market produces an avenue for

surplus/idle cash balances to be employed in areas of deficit finances, as it

make short medium and long-term surplus funds available.

The various products sold in the financial market. There are two types of

financial market. They are money market and capital market. The components
9

or the products or services sold in the money market are treasury bills,

commercial papers, bankers acceptance and certificate of deposit. It is a short

term credit. On the other hand, the capital market is a long term market for

long term investments. The types of products sold there are share, securities,

bonds etc.


VARIOUS TYPES OF MARKET THAT EXIST IN THE CAPITAL

MARKET.

Money. Originally, came in as medium of exchange in the formally organized

market. However, the society later got highly developed and sophisticated that

people, institutions and governments needed funds to execute projects. There

was a direct need for capital, money or funds.

Consequently, the financial market evolved. The financial market is divided

into money and capital market.

Money market is a forum where short-term capital is sourced. Therefore, the

corporate body, that requires such fund, creates instruments with which to

source such funds. By its nature, the types of funds sources in the money

market are largely debt or loan funds. The life span of such funds usually

ranges from few hours to about twenty-four months or two years.
10

This is the financial market where short and medium term finances are sold

and brought. The major reasons behind the establishment of the money

market in Nigeria.

Money market instruments include the following

  - Treasury bills

  - Banking acceptance

  - Commercial papers

  - Certificate of deposit

  - Treasury bill (TBS): These are short term securities issued by the

     federal governments of Nigeria. They mature within two days from the

     date of issue and are default free. Instead of attracting interest, these

     promissory notes are sold at the discount.

  - Certificate of Deposit (COD): They are inter bank debit instrument

     meant to provide outlets for the commercial banks surplus funds. This

     scheme which was introduced in the country by the central bank of

     Nigeria in 1995 was meant to open up a new source of funds for the

     Merchant Bank. The two types of certificates of deposits are negotiable

     and non-negotiable certificate of deposit.

  - Commercial paper bills: These are promissory notes in various

     denominations, issued by the Central Bank of Nigeria with maturity
11

  period of 50 to 270 days. Commercial bills may also be sold by major

  companies (Blue-chips) to obtain a loan. In this case, such notes are not

  backed by collateral; rather they rely on the high credit rating of the

  issuing companies.

- Banker Acceptance: On introduction in 1975 by the central Bank,

  was originally meant to mop up excess liquidity in the banking system. It

  was aimed at broadening the market for federal government stock. And

  so commercial banks holding of the stock are accepted as a part of their

  specified liquid assets and are accepted as a part of their specified

  liquid assets and are accepted as a part of their specified liquid assets

  and are accepted as a part of their specified liquid assets and are

  accepted as a Part of their specified liquid assets and are repayable on

  demand. Under the BUF, Federal Government stocks of 3 years of less

  to maturity were designated Eligible Development stocks (EDS) for the

  purpose of meeting the bank’s specified liquid assets requirements.

  Capital Market: The capital market is a financial market where long-

  term financial market where long-term financial securities are traded on.

  It is a market that brings together suppliers and buyers of long-term

  finances for investment.
12

     The Comparative study of the relationship price and firm
     profitability in capital market.
     Trend between stocks of companies and profitability.

YEARS        STOCKS         PROFIT           GROWTH         GROWTH
                            (N6000)          RATE     IN RATE          IN
                                             STOCK.         PROFIT.
   1997         132073           702,986         -               -
   1998         176,096          727,363       33.3             3.5
   1999         264,143          751,740         50             3.4
   2000         264,143          1,064,168       0              41.6
   2001         330,178          1,647,836       25             54.8
   2002         375,315          2249078       13.7             34.5
   2003         375315           2684927         0              19.4
   2004         500420           2812623       33.3             4.8
   2005         500420           27107221        0              -3.8
   2006         550420           4665459         10             72
Source: The Nigerian Stock Exchange fact book 2002.
The Annual Report and Account of Cadbury 2006.

The comparative Analysis of the share price and firms profitability
of companies with Reference to Cadbury Nigeria plc.
Between share price and profitability of Cadbury Nigeria plc.


   Year          Growth Rate in share         Growth Rate Profits.

                          price
   1997                      -                              -

   1998                    -12                          3.5

   1999                   -19.3                         3.4
13

   2000                  20.8                       41.6

   2001                  62.8                       54.8

   2002                    -2                       34.5

   2003                  113.3                      19.4

   2004                   -8.6                       4.8

   2005                   12                        -3.8

   2006                  -45.1                       10
Source: The Annual Report and Accounts of Cadbury 2006.
The Nigerian Stock Exchange fact book 2002 Newspapers.

Trend Between share price and profitability of Nestle Nigeria plc.

   Year         Growth Rate in share       Growth Rate Profits.

                         price
   1997                    -                             -

   1998                  -49.1                     10.50

   1999                   -2.3                       56

   2000                  136.1                      28.6

   2001                  48.7                       57.4

   2002                  25.1                       25.8

   2003                  56.9                       19.7

   2004                  13.6                        0.8

   2005                  31.2                       38.3
14

    2006                  20.9                          6.7
Source: The Annual Report and Accounts of Cadbury 2006.
The Nigeria Stock Exchange fact book 2002 Newspapers.
The Relationship Between share price and firms profitability.

      Year           Growth Rate in          Growth Rate
                       share price              Profits.
      1997                 22.9                   703

      1998                 18.1                   727

      1999                 14.6                   752

      2000                 18.8                  1064

      2001                30.61                  1648

      2002                 30.0                  2249

      2003                 64.0                  2685

      2004                58.52                  2813

      2005                65.52                  2711

      2006                35.95                  4665
Sources: The Annual; Report and Accounts of Cadbury 2006.
                                                              ST
The Nigerian Stock Exchange fact book 2002 Newspaper (31           December of
each year).

The Relationship Between Earning per share and firms

profitability.

    Years        Earning per share.         Profits. N000
     1997                 1.71                    703
15

               1998                       1.41                         727

               1999                       1.51                         752

               2000                       2.02                        1064

               2001                       2.06                        1648

               2002                       3.00                        2249

               2003                       3.57                        2685

               2004                       2.81                        2813

               2005                       2.70                        2711

               2006                       4.28                        4665
        Sources: The Annual Report and Accounts of Cadbury 2006.
                    The Nigerian Stock Exchange fact book 2002


        METHODOLOGY
                            2         2                                         2                      2
Years   X       Y       X         Y              XY          X-X        (X-X)         Y-Y      (Y-Y)
                                                             X1                       YI


1997    703     22.9    494209    524.41         16098.7     -1298.7    1686621.69    -13      169
1998    727     18.1    528529    327.61         13158.7     -1274.7    1624860.09    -17.8    316.84
1999    752     14.6    565504    213.16         10979.2     -1249.7    1561750.09    -213     453.69
2000    1064    18.8    1132096   352.44         20032       -937.7     879281.29     -17.1    292.4
2001    1648    30.61 2715904     936.97         50445.28    -353.7     124103.69     -5.29    27.98
2002    2249    30.0    5058001   900            67470       247.3      61157.29      -5.9     34.81
2003    2685    64.0    7209225   4096           171840      6803.3     466898.89     28.1     789.61
2004    2813    58.52 7912969     3424.59        164616.78   811.3      658207.69     22.62    511.66
2005    2711    65.52 7349521     4292.87        177624.72   7093       503106.49     29.62    81734
2006    4665    35.95 21762225 1292.4            167706.75   2663.3     7093166.89    0.05     0.0025
  Σ     0017    357     5428183   16361.45       859943.31   0          14660153.21   0        3473.34
16

x       =   Σx       =     20017     =       2001.7
            N                  10


y       =   Σy       =         359   =       35.7
            N                  10
Formular

Y       =   b o + b i xi + E

Sp      =   bo + b i p i + E

Where:

bo      =   y - bi x



bi      =   n Σxy – (Σy) (Σx)
                 2         2
            n Σx – (Σx)


bi      =   10 (859943.31 – (359) (20017)
                                         2
            10 (54728183) – (20017)

bi      =   8599433.1 – 7186103

            547281830 - 400680289

bi      =   1413330.1

            14660541

bi      =   0.0096




Also;
17

bo           =   y - bi x
bo           =   35.9 – 0.0076 (28017)

bo           =   35.9 – 19.21632

bo           =   16.68368

             =   16.684

Sp           =   16.684 + 0.0096 PL + 2

The computation above signified that there is a significant relationship

between stock prices and firms profitability and it is a positive relationship. The

partial coefficient of the regression line signifies that 0.0096% change in the

firm’s profitability can be associated with 1% change in stock price.

Solving to get the coefficient of determination “12” we get the square root of
 2
R , that is       R



     2                                      2
R            =   ( n Σxy – (Σx) (Σy) (Σy)
                        2      2     2
                 ( n Σx – (Σx) (Σy) )
                   2
R            =   R

 2                                                  2
R            =   (10 (859943.31 –(20017) (359)
                                                2                2
                 (10 (54728183) – (20017) (10 (16361.45 – (359) )
     2
R        i   =   ( 8599433.1 – 7186103)

                 (547281830 – 400680289) (16361.45 – 128881)
18
 2                                        2
R        =            (1413330.1 )

                      (14660541) (34733.5)
 2
R        =            0.3923

R        =            0.3923

R        =            0.6263

Thus, from the computed R, the valve is 0.6263 of the total variation in the

stock price can be explained by the profitability. Also the R calculated shows

that a positive relationship exists between profitability and stock price.

Standard error test

Solving to test for the statistical significant of the coefficient of a regression

line.



                        2       2
Sbo =                 Σe (Σx)
                                         2
                      (n-k-1) (nΣx        1




                  2
Sbi =        Σe
                                     2
                      (n-k-1) (Σx 1)



     2                      2       2
Σe       =            (1- R ) Σy     1


     2
Σe       =            (1-0.3923) (3473.34)
19
     2
Σe       =   0.6077 x 3473.34
     2
Σe       =   2110.75




Sbo =        (2110.75) (54728183)

             (101 -1-1) (10) (14660153-21)



                                11
Sbo =        1.155175123 x 10

             8x10x14660153.21



                               11
Sbo =        1.55175123 x 10

             1172812257




Sbo =        98.496




Sbo =        9.93




Also;




Sbi =        2110.75

             (101 -1-1) (14660153-21)
20




Sbi =            2110.75

                  8x10x14660153.21




Sbi = 2110.75

                 117281225.7




Sbi = 0.0001799




Sbi =            0.0134

DECISION RULE

If the standard error test is less than a half of the numerical valve of bi i.e if Sbi

    1
< bi /2 accept Hi and reject Ho otherwise accept Ho and reject Hi.

                                        1
Therefore, since Sbi = 0.0132 > bi /2 = 0.0048 we however accept Ho and

conclude that there is no significant relationship between stock price and firms

profitability.

T – Test

Solving to test for the statistical significance of the regression coefficient

profitability.

Formular
21

tbo     =   bo

            Sbo

tbi     =   bi

            Sbi

tbo     =   16.684

            9.93

Tbo =       1.680

Also:

tbi     =   0.0096

            0.0134

tbi     =   0.716

at 5% level of significance t – tabulated = 0.05 = 0.25

1-0.025 = 0.975

Degree of freedom

n-k-i

where;

n = 10, k =1

10-1-1 =8

t0.975 = 2.31
22

hence,

since t > tt i.e 0716 < 2.31. however, we accept Ho and reject Hi,

measuring that the inclusion of profitability and stock price is not

statistically significant.

SUMMARY OF FINDINGS

The study emphasized that stock price plays tremendous role in firms

profitability using Cadbury Nigeria Plc as a case s study. The followings

were made:

   1. There is significant relationship between stock prices and firms

      profitability.

   2. There is equally a relationship between earning per share and firms

      profitability.

   3. The fluctuation of the stock prices poses a lot of problems to the

      firms profitability.

   4. Low level of market awareness pose a challenge to the Nigeria

      Stock Market which in turn affects forms profitability.

   5. The regression result show that the t-test between profitability and

      stock price is 0.716 which means that the inclusion of profitability

      and stock price is not statistically significant.
23

   6. Finally, on the other hand, a weak positive relationship exist

      between earning per share and profitability.

   7. Since the coefficient of determination is at 0.95127.




                            CONCLUSIONS

the study x-rayed the Nigerian Capital Market and its relationship with the

firms profitability suing Cadbury as area of the study and thus concluded

that stock prices and earning per share depends nearly on the firms

profitability.

Therefore, firms profitability has a positive relationship with stock prices

and earning per share meaning that firm will make enormous profit when

the stock prices are favourable, while the reverse is the case when stock

prices are unforvourable.




                        RECOMMENDATIONS

Having clearly appraised a comparative study of the relationships

between stock price performance and firm’s profitability: a case study of

Cadbury Nigeria Plc. It is patient at this juncture to prefer some solutions

to these problems following the findings of the study.
24

- Firms should be conscious of the development in the Nigerian

  Capital Market since their profitability depends heavily on the stock

  prices.

- Government through the CBN should strengthen the laws guiding

  the operations of the Nigerian Capital Market to make it more

  dependable.

- The NSE on conjunction with the SEC should make a deliberate

  attempt to increase the number of an improve the stock market.

- The NCM should further decent realize its offices so that its gets

  more closer to investors and users of fund.

- The NCM should as well intensify                 her public awareness

  programme in order to reach the unreached in the country.

- Finally, improvement should be made on the infrastrutural problems

  that still plague the Nigerian Capital Market.
25




                                   REFERENCES

Alile, H.I. (1992) “The Structure and Role of Nigeria” Capital Market” A Paper Presented at

                                                                           th      th
   the national Seminar on Financing Public Projects, Held at Abuja 12          – 13 March,

   1992.

Alile H.I, Anao A. R (1986): The Nigerian Stock Market in Operation, Jeromelaiho &

     Associates Ltd Ikeya Lagos.

Anyafo A.M.O. (2000) “Nigeria Financial Market and Institutions”, Banking and Finance

   Publication University of Nigeria Enugu Campus, Enugu.
26

Anyarnwu, J.C. (1993) Monetary Economic Theory Policy and Institutions. Onitsha: Hybrid

   Publishers Ltd Page 191.

Dada, I.O (2003) “The Nigerian Capiatla Market; Development, Issues and Polices. Ibadan,

   Nigeria; Pubishers by Spectrum Boook Ltd Pg 19.

Francis, M. (2007): Customer Relationship Management, Concepts and Tools Burlington

     M.A.

Gordon, W., Cheese J, Sherril K., & Rushton A. (1984): Introducing Marketing by MCB
     University Press Ltd Bradford.
Jhingan, M.L. (2002) Money, Banking International Trade and Public Finance, Vrinda

   Publication (p) Ltd 3-5 Ashish Complex Delhi-10091

Nwankwo, G.O. (1980) “The Nigerian Financial Analysis” London. Mamma Loan Press.

Nwaiwu,. O. (2006). Marketing of Financial Services 2. Adebayo Oyelana Street, Lagos

     Nigeria.

Nwite, S.C. (2004) Element of Insurance. Enugu Immaculate Publishers,

Nwite, S.C. (2007) “Principle and Practice of Insurance of the person” ESUT lecture mimo

   graph unpublished.

Onuigbo, O. (2004). The Marketing of Financial Services in Nigeria. Aba. Esquire Press &

     Books.

Orjih J. (2002) Banking and Finance Principle Policies and Institution. Enugu Splashmendia

   Organization Nigeria.

Richard, C.W. (1994): Orchestrating Service Sales and Marketing Management.

Sinkey, J.F. (1973) “Failure of US Natural Bank of San Oiego or portfolio and Performances

   Analysis”. Journal of Bank Research P42
27

Uche, C.U. (1996) “The Nigeria failed Bank Decree Critiques burnal of International

   Banking Laws” Vol.11, Issue Lo.

Vern, T. (1972): International Marketing Illinois Dryden Press.

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A comparative study of the relationship between stock price

  • 1. 1 A COMPARATIVE STUDY OF THE RELATIONSHIP BETWEEN STOCK PRICE PERFORMANCE AND FIRM’S PROFITABILITY SUNDAY C. NWITE SENIOR LECTURER DEPARTMENT OF BANKING AND FINANCE EBONYI STATE UNIVERSITY – ABAKALIKI
  • 2. 2 PHONE NO: 080-37743134 E-MAIL: nwitewhite2006@yahoo.com ABSTRACT In Nigeria, there are many investors. Most of the investments are done on stocks, equities, shares etc. investors prefer to invest in the area that has better performance and profitability. In most cases, because of the volatility of the market, they seek advise on the market, the annual report of such companies for at least five years. There are a lot of attractions to invest. It is one of the best ways of savings, and an idle fund is also a wasted fund and it is also an avenue to have a seat on the board. The share certificates can easily be converted into liquidity and also act as collaterals. This work therefore wants to look at the relationship between the stock price performance and their profitability. And it was found that such firm that make more profits do therefore have a better performance of their stock prices. Conclusion was drawn that that the stock price performance influences the profit of the firm. Recommendations were made that investors should always consult analyst of the stock market, professionals, stock brokers. They can also seek information from other research professional bodies. This will help
  • 3. 3 them to understand companies that do well and the ones that are not doing well so that they will know the one to invest. KEYWORDS Stock price, performance, profitability, collaterals, seat on the board. PAPER TYPE: RESEARCH PAPER INTRODUCTION
  • 4. 4 The capital market is the long-term financial market. It is made up of primary and secondary market and institutions, which facilitate the issuance and secondary trading of long-term financial instruments. The capital market provides funds to industries and governments to meet their long-term capital requirements, such as financing for fixed investments, etc. The Nigerian stock exchange as a vision to promote capital formation in the country by providing issuers and investors with a responsive, fair efficient stock market (Ahmed, 2008). The Nigerian capital market (NCM) first came into existence in 1960 with the establishment of the Lagos Stock Exchange. Before the establishment of the Lagos Stock Exchange in 1960, almost all formal savings and deposits went through the banking system while major capital balance were invested for the country by the British on the London Stock Exchange. The purpose of investment in stocks shares and equities is to make profit by dividend payout or to increase the volume of the shares by ploughing back the profit made. In most cases, people prefer those companies that are doing well in the Nigerian Capital Market. It is a believe that companies that are doing well will make more profit all these are assumptions. The work wants to have a comparative study on the relationship between stock prices and profitability of
  • 5. 5 the firm, to know whether such assumptions are true or not using published data. HISTORICAL DEVELOPMENT OF NIGERIAN CAPITAL MARKET The beginning of the capital market in Nigerian can be traced to the country’s colonial administration which in the 1946 established a 10 years plan for Nigerian under which long-term funds were raised in the United Kingdom and Nigeria for financing small community improvement project, educational research and educational infrastructure and to induce private sector industrial and agricultural development (Okereke, 2000). Formal capital market activities in Nigeria came into existence with the establishment of the Lagos Stock Exchange in March 1960 and in September 15, 1961, it commenced business before the establishment of the Lagos State Exchange, almost all formal savings and deposits went through the banking system while major capital balances were invested for the country by British on the London Stock Exchange. The exchange started operations with 19 securities listed for trading. In an effort to accelerate the orderly growth of the capital market in Nigeria, the federal government in 1962 established the Capital Issue Committee. The committee was changed, inter-alia with the responsibility of regulating the timing of public issues of securities. To further strengthen the regulatory oversight of the capital issue committee was later
  • 6. 6 changed to Capital Issue Committee (CIC) under the Capital Issue Committee Act (1973). In 1977 following the federal government review panel headed by Dr. Pius Okigbo, the Lagos Stock Exchange was changed to Nigerian Stock Exchange. Following a comprehensive review of the Nigeria financial system in 1978, the Securities and Exchange Commission (SEC) was established by the promulgation of the SEC (1979). The Act was enacted at a time when the indigenization exercise was in progress and the commission was saddled with the responsibility of valuing the shares of enterprises. There are other landmark events in the history of capital market among which were the setting up of Adeosun and Okigbo panels, the inter-ministerial communities, the review of companies and allied matters and the indigenization decrees. In 1996, the federal government set up a panel on the review of the Nigerian capital market known as Oditte Panel. The panel submitted its report in October, 1996 with recommendations to the federal government which were the urgent need to mobilize the country for prosperity, to provide facilities for capital mobilization and trading in the rural areas in form of capital trade points (mini stock exchange) and the establishment of a technology driven national exchange in Abuja to be known as the Abuja Stock Exchange (ASE) to
  • 7. 7 operate to international standards. Abuja Stock Exchange was incorporated as a public liability company on June 17, 1999 and received its license to operate as full fledged community exchange on August 1, 2000. Other branches of stock exchange in Nigeria includes: Kaduna, 1978; Port – Harcourt 1980; Kano 1989, Onitsha February 1990; Ibadan August, 1990; Yola April 2002 and Benin 2005. THE REASONS FOR THE EXISTENCE OF NIGERIAN CAPITAL MARKET The Nigerian capital markets just like its counterparts in other countries have a lot of reasons to perform in other to ensure economic development; there are: 1. Provide an additional channel for engaging and mobilizing domestic savings for productive investment and represents an alternative to bank deposits, real estate investment and the financing of consumption loans. 2. Provides depositors with better protection against inflation and currency depreciation. 3. It fosters the growth of the domestic financial services sector and the various forms of institutional savings such as life insurance pension funds.
  • 8. 8 4. It improves the gearing of the domestic corporate sector and helps reduce dependence on borrowing. 5. It improve the efficiency of capital and a market mechanism for management changes as compared with the administrative or political mechanism of public sector corporation. 6. To facilitate the transfer of enterprises from the public sector to the private sector. 7. To encourage privatization by increasing the marketability access to new issues. 8. Provide access to finance for new and smaller companies and encourage institutional development in facilitating the setting up of Nigeria’s domestic funds, foreign funds, and venture capital funds. VARIOUS PRODUCTS SOLD IN THE FINANCIAL MARKET According to Nwite (2005) financial market is where exchange of financial resources takes place. That is a market where sellers and buyers of financial resources come into contact. Thus, a financial market produces an avenue for surplus/idle cash balances to be employed in areas of deficit finances, as it make short medium and long-term surplus funds available. The various products sold in the financial market. There are two types of financial market. They are money market and capital market. The components
  • 9. 9 or the products or services sold in the money market are treasury bills, commercial papers, bankers acceptance and certificate of deposit. It is a short term credit. On the other hand, the capital market is a long term market for long term investments. The types of products sold there are share, securities, bonds etc. VARIOUS TYPES OF MARKET THAT EXIST IN THE CAPITAL MARKET. Money. Originally, came in as medium of exchange in the formally organized market. However, the society later got highly developed and sophisticated that people, institutions and governments needed funds to execute projects. There was a direct need for capital, money or funds. Consequently, the financial market evolved. The financial market is divided into money and capital market. Money market is a forum where short-term capital is sourced. Therefore, the corporate body, that requires such fund, creates instruments with which to source such funds. By its nature, the types of funds sources in the money market are largely debt or loan funds. The life span of such funds usually ranges from few hours to about twenty-four months or two years.
  • 10. 10 This is the financial market where short and medium term finances are sold and brought. The major reasons behind the establishment of the money market in Nigeria. Money market instruments include the following - Treasury bills - Banking acceptance - Commercial papers - Certificate of deposit - Treasury bill (TBS): These are short term securities issued by the federal governments of Nigeria. They mature within two days from the date of issue and are default free. Instead of attracting interest, these promissory notes are sold at the discount. - Certificate of Deposit (COD): They are inter bank debit instrument meant to provide outlets for the commercial banks surplus funds. This scheme which was introduced in the country by the central bank of Nigeria in 1995 was meant to open up a new source of funds for the Merchant Bank. The two types of certificates of deposits are negotiable and non-negotiable certificate of deposit. - Commercial paper bills: These are promissory notes in various denominations, issued by the Central Bank of Nigeria with maturity
  • 11. 11 period of 50 to 270 days. Commercial bills may also be sold by major companies (Blue-chips) to obtain a loan. In this case, such notes are not backed by collateral; rather they rely on the high credit rating of the issuing companies. - Banker Acceptance: On introduction in 1975 by the central Bank, was originally meant to mop up excess liquidity in the banking system. It was aimed at broadening the market for federal government stock. And so commercial banks holding of the stock are accepted as a part of their specified liquid assets and are accepted as a part of their specified liquid assets and are accepted as a part of their specified liquid assets and are accepted as a part of their specified liquid assets and are accepted as a Part of their specified liquid assets and are repayable on demand. Under the BUF, Federal Government stocks of 3 years of less to maturity were designated Eligible Development stocks (EDS) for the purpose of meeting the bank’s specified liquid assets requirements. Capital Market: The capital market is a financial market where long- term financial market where long-term financial securities are traded on. It is a market that brings together suppliers and buyers of long-term finances for investment.
  • 12. 12 The Comparative study of the relationship price and firm profitability in capital market. Trend between stocks of companies and profitability. YEARS STOCKS PROFIT GROWTH GROWTH (N6000) RATE IN RATE IN STOCK. PROFIT. 1997 132073 702,986 - - 1998 176,096 727,363 33.3 3.5 1999 264,143 751,740 50 3.4 2000 264,143 1,064,168 0 41.6 2001 330,178 1,647,836 25 54.8 2002 375,315 2249078 13.7 34.5 2003 375315 2684927 0 19.4 2004 500420 2812623 33.3 4.8 2005 500420 27107221 0 -3.8 2006 550420 4665459 10 72 Source: The Nigerian Stock Exchange fact book 2002. The Annual Report and Account of Cadbury 2006. The comparative Analysis of the share price and firms profitability of companies with Reference to Cadbury Nigeria plc. Between share price and profitability of Cadbury Nigeria plc. Year Growth Rate in share Growth Rate Profits. price 1997 - - 1998 -12 3.5 1999 -19.3 3.4
  • 13. 13 2000 20.8 41.6 2001 62.8 54.8 2002 -2 34.5 2003 113.3 19.4 2004 -8.6 4.8 2005 12 -3.8 2006 -45.1 10 Source: The Annual Report and Accounts of Cadbury 2006. The Nigerian Stock Exchange fact book 2002 Newspapers. Trend Between share price and profitability of Nestle Nigeria plc. Year Growth Rate in share Growth Rate Profits. price 1997 - - 1998 -49.1 10.50 1999 -2.3 56 2000 136.1 28.6 2001 48.7 57.4 2002 25.1 25.8 2003 56.9 19.7 2004 13.6 0.8 2005 31.2 38.3
  • 14. 14 2006 20.9 6.7 Source: The Annual Report and Accounts of Cadbury 2006. The Nigeria Stock Exchange fact book 2002 Newspapers. The Relationship Between share price and firms profitability. Year Growth Rate in Growth Rate share price Profits. 1997 22.9 703 1998 18.1 727 1999 14.6 752 2000 18.8 1064 2001 30.61 1648 2002 30.0 2249 2003 64.0 2685 2004 58.52 2813 2005 65.52 2711 2006 35.95 4665 Sources: The Annual; Report and Accounts of Cadbury 2006. ST The Nigerian Stock Exchange fact book 2002 Newspaper (31 December of each year). The Relationship Between Earning per share and firms profitability. Years Earning per share. Profits. N000 1997 1.71 703
  • 15. 15 1998 1.41 727 1999 1.51 752 2000 2.02 1064 2001 2.06 1648 2002 3.00 2249 2003 3.57 2685 2004 2.81 2813 2005 2.70 2711 2006 4.28 4665 Sources: The Annual Report and Accounts of Cadbury 2006. The Nigerian Stock Exchange fact book 2002 METHODOLOGY 2 2 2 2 Years X Y X Y XY X-X (X-X) Y-Y (Y-Y) X1 YI 1997 703 22.9 494209 524.41 16098.7 -1298.7 1686621.69 -13 169 1998 727 18.1 528529 327.61 13158.7 -1274.7 1624860.09 -17.8 316.84 1999 752 14.6 565504 213.16 10979.2 -1249.7 1561750.09 -213 453.69 2000 1064 18.8 1132096 352.44 20032 -937.7 879281.29 -17.1 292.4 2001 1648 30.61 2715904 936.97 50445.28 -353.7 124103.69 -5.29 27.98 2002 2249 30.0 5058001 900 67470 247.3 61157.29 -5.9 34.81 2003 2685 64.0 7209225 4096 171840 6803.3 466898.89 28.1 789.61 2004 2813 58.52 7912969 3424.59 164616.78 811.3 658207.69 22.62 511.66 2005 2711 65.52 7349521 4292.87 177624.72 7093 503106.49 29.62 81734 2006 4665 35.95 21762225 1292.4 167706.75 2663.3 7093166.89 0.05 0.0025 Σ 0017 357 5428183 16361.45 859943.31 0 14660153.21 0 3473.34
  • 16. 16 x = Σx = 20017 = 2001.7 N 10 y = Σy = 359 = 35.7 N 10 Formular Y = b o + b i xi + E Sp = bo + b i p i + E Where: bo = y - bi x bi = n Σxy – (Σy) (Σx) 2 2 n Σx – (Σx) bi = 10 (859943.31 – (359) (20017) 2 10 (54728183) – (20017) bi = 8599433.1 – 7186103 547281830 - 400680289 bi = 1413330.1 14660541 bi = 0.0096 Also;
  • 17. 17 bo = y - bi x bo = 35.9 – 0.0076 (28017) bo = 35.9 – 19.21632 bo = 16.68368 = 16.684 Sp = 16.684 + 0.0096 PL + 2 The computation above signified that there is a significant relationship between stock prices and firms profitability and it is a positive relationship. The partial coefficient of the regression line signifies that 0.0096% change in the firm’s profitability can be associated with 1% change in stock price. Solving to get the coefficient of determination “12” we get the square root of 2 R , that is R 2 2 R = ( n Σxy – (Σx) (Σy) (Σy) 2 2 2 ( n Σx – (Σx) (Σy) ) 2 R = R 2 2 R = (10 (859943.31 –(20017) (359) 2 2 (10 (54728183) – (20017) (10 (16361.45 – (359) ) 2 R i = ( 8599433.1 – 7186103) (547281830 – 400680289) (16361.45 – 128881)
  • 18. 18 2 2 R = (1413330.1 ) (14660541) (34733.5) 2 R = 0.3923 R = 0.3923 R = 0.6263 Thus, from the computed R, the valve is 0.6263 of the total variation in the stock price can be explained by the profitability. Also the R calculated shows that a positive relationship exists between profitability and stock price. Standard error test Solving to test for the statistical significant of the coefficient of a regression line. 2 2 Sbo = Σe (Σx) 2 (n-k-1) (nΣx 1 2 Sbi = Σe 2 (n-k-1) (Σx 1) 2 2 2 Σe = (1- R ) Σy 1 2 Σe = (1-0.3923) (3473.34)
  • 19. 19 2 Σe = 0.6077 x 3473.34 2 Σe = 2110.75 Sbo = (2110.75) (54728183) (101 -1-1) (10) (14660153-21) 11 Sbo = 1.155175123 x 10 8x10x14660153.21 11 Sbo = 1.55175123 x 10 1172812257 Sbo = 98.496 Sbo = 9.93 Also; Sbi = 2110.75 (101 -1-1) (14660153-21)
  • 20. 20 Sbi = 2110.75 8x10x14660153.21 Sbi = 2110.75 117281225.7 Sbi = 0.0001799 Sbi = 0.0134 DECISION RULE If the standard error test is less than a half of the numerical valve of bi i.e if Sbi 1 < bi /2 accept Hi and reject Ho otherwise accept Ho and reject Hi. 1 Therefore, since Sbi = 0.0132 > bi /2 = 0.0048 we however accept Ho and conclude that there is no significant relationship between stock price and firms profitability. T – Test Solving to test for the statistical significance of the regression coefficient profitability. Formular
  • 21. 21 tbo = bo Sbo tbi = bi Sbi tbo = 16.684 9.93 Tbo = 1.680 Also: tbi = 0.0096 0.0134 tbi = 0.716 at 5% level of significance t – tabulated = 0.05 = 0.25 1-0.025 = 0.975 Degree of freedom n-k-i where; n = 10, k =1 10-1-1 =8 t0.975 = 2.31
  • 22. 22 hence, since t > tt i.e 0716 < 2.31. however, we accept Ho and reject Hi, measuring that the inclusion of profitability and stock price is not statistically significant. SUMMARY OF FINDINGS The study emphasized that stock price plays tremendous role in firms profitability using Cadbury Nigeria Plc as a case s study. The followings were made: 1. There is significant relationship between stock prices and firms profitability. 2. There is equally a relationship between earning per share and firms profitability. 3. The fluctuation of the stock prices poses a lot of problems to the firms profitability. 4. Low level of market awareness pose a challenge to the Nigeria Stock Market which in turn affects forms profitability. 5. The regression result show that the t-test between profitability and stock price is 0.716 which means that the inclusion of profitability and stock price is not statistically significant.
  • 23. 23 6. Finally, on the other hand, a weak positive relationship exist between earning per share and profitability. 7. Since the coefficient of determination is at 0.95127. CONCLUSIONS the study x-rayed the Nigerian Capital Market and its relationship with the firms profitability suing Cadbury as area of the study and thus concluded that stock prices and earning per share depends nearly on the firms profitability. Therefore, firms profitability has a positive relationship with stock prices and earning per share meaning that firm will make enormous profit when the stock prices are favourable, while the reverse is the case when stock prices are unforvourable. RECOMMENDATIONS Having clearly appraised a comparative study of the relationships between stock price performance and firm’s profitability: a case study of Cadbury Nigeria Plc. It is patient at this juncture to prefer some solutions to these problems following the findings of the study.
  • 24. 24 - Firms should be conscious of the development in the Nigerian Capital Market since their profitability depends heavily on the stock prices. - Government through the CBN should strengthen the laws guiding the operations of the Nigerian Capital Market to make it more dependable. - The NSE on conjunction with the SEC should make a deliberate attempt to increase the number of an improve the stock market. - The NCM should further decent realize its offices so that its gets more closer to investors and users of fund. - The NCM should as well intensify her public awareness programme in order to reach the unreached in the country. - Finally, improvement should be made on the infrastrutural problems that still plague the Nigerian Capital Market.
  • 25. 25 REFERENCES Alile, H.I. (1992) “The Structure and Role of Nigeria” Capital Market” A Paper Presented at th th the national Seminar on Financing Public Projects, Held at Abuja 12 – 13 March, 1992. Alile H.I, Anao A. R (1986): The Nigerian Stock Market in Operation, Jeromelaiho & Associates Ltd Ikeya Lagos. Anyafo A.M.O. (2000) “Nigeria Financial Market and Institutions”, Banking and Finance Publication University of Nigeria Enugu Campus, Enugu.
  • 26. 26 Anyarnwu, J.C. (1993) Monetary Economic Theory Policy and Institutions. Onitsha: Hybrid Publishers Ltd Page 191. Dada, I.O (2003) “The Nigerian Capiatla Market; Development, Issues and Polices. Ibadan, Nigeria; Pubishers by Spectrum Boook Ltd Pg 19. Francis, M. (2007): Customer Relationship Management, Concepts and Tools Burlington M.A. Gordon, W., Cheese J, Sherril K., & Rushton A. (1984): Introducing Marketing by MCB University Press Ltd Bradford. Jhingan, M.L. (2002) Money, Banking International Trade and Public Finance, Vrinda Publication (p) Ltd 3-5 Ashish Complex Delhi-10091 Nwankwo, G.O. (1980) “The Nigerian Financial Analysis” London. Mamma Loan Press. Nwaiwu,. O. (2006). Marketing of Financial Services 2. Adebayo Oyelana Street, Lagos Nigeria. Nwite, S.C. (2004) Element of Insurance. Enugu Immaculate Publishers, Nwite, S.C. (2007) “Principle and Practice of Insurance of the person” ESUT lecture mimo graph unpublished. Onuigbo, O. (2004). The Marketing of Financial Services in Nigeria. Aba. Esquire Press & Books. Orjih J. (2002) Banking and Finance Principle Policies and Institution. Enugu Splashmendia Organization Nigeria. Richard, C.W. (1994): Orchestrating Service Sales and Marketing Management. Sinkey, J.F. (1973) “Failure of US Natural Bank of San Oiego or portfolio and Performances Analysis”. Journal of Bank Research P42
  • 27. 27 Uche, C.U. (1996) “The Nigeria failed Bank Decree Critiques burnal of International Banking Laws” Vol.11, Issue Lo. Vern, T. (1972): International Marketing Illinois Dryden Press.