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EARNINGS VOLUME AND SHARE PRICE VOLATILITY, A FOCUS ON THE NIGERIAN STOCK EXCHANGE.

Project Topic: Earnings Volume and Share Price Volatility, a Focus on the Nigerian Stock Exchange


 ABSTRACT

In the most precise manner, this research work highlights the concept of the Nigerian stock exchange (NSE) market in relation to the banking industry (quoted bank), it examines the effects of some financial ratios on the share price volatility. To be understandable to the readers, this study has been structured into five chapters. The first chapter, which is called research introduction, formed the basis of the research work. It is the bedrock on which the study was built. It introduced the components of the financial system of which more emphasis was placed on the Nigerian stock exchange which formed the core of the topic, “earnings volume and share price volatility, a focus on the Nigerian stock exchange”. Chapter two is the overview of the Nigerian capital market and the detailed review of research conducted by some experts who carried out similar research work. Chapter three is the research methodology, where the research design which describes the area of the study, the population, the sampling and sampling techniques, instruments, method of data collection, method of data analysis and the economic model used in the study.  Based on the research method specified in chapter three, chapter four presents and analyzes the relevant data. The data were analyzed using the coefficient of variation which measures the rate of variability of both the dependent and independent variables. Regression analysis and the linear coefficient of correlation were used in analyzing the data. In chapter five, the summary of the findings, policy implications, conclusion of the study, recommendations and future research path were presented. The research was carried out to meet the current trends and challenges facing investors concerning the variability of share prices in the Nigerian stock exchange The potential investors, intending investors, prospective investors, students, government, bankers, readers, researchers, etc, will find this work very useful.

CHAPTER ONE

BACKGROUND OF THE STUDY

INTRODUCTION

The financial system of any society is the framework within which capital formation takes place. Alile (1997) puts it as the framework within which the savings of some members of the society are made available to other members of the society for productive investments.

According to Okigbo (1981), the financial system can be defined as “a family of rules and regulations and the congress of financial arrangement, institutions, agents and the mechanism whereby they relate to each other within the financial sectors and the rest of the world”

The financial system consists of different institutions which could be divided into two categories:

  1. The monetary financial institutions, which ensure the supply of an adequate stock of money to service the needs of the economy.
  2. The non-monetary financial institutions, which facilitate the transfer of money between the economic units.

Furthermore, the financial system consists of four distinct components; the financial institutions, the financial markets, the financial instruments and the regulatory bodies. The financial market is divided into money market and the capital market.

However, Ojo and Adewumi (1982) used the term financial market to embrace both the money and capital market. The money market deals with the trading of short-term financial instruments while the capital market deals with long-term securities. The difference being the maturity period of securities traded in each market.

History shows that the growth and development of modern economies were achieved and sustained through the capital markets. How well a capital market performs in relation to other capital markets and mainly in relation to the role it is expected to play in enhancing economic growth and development depends on various factors of which corporate earnings is one of such factors.

Capital market is a network of financial institutions which facilitate the mobilization and allocation of medium and long-term funds through the issuance and trading of financial instruments. Such instruments, otherwise known as securities, include equities and bonds.

The capital market essentially is a vehicle for mobilizing and allocating funds from surplus economic units to the deficit units. This function mainly depends on the efficient development of the capital market. As a major source of appropriate long-term funds, the capital market is obviously crucial to any nation’s economic development. Specifically, the capital market provides funds for corporate organizations and government to meet their long-term capital requirements. Hence, it plays an important role in stimulating industrial growth and development by creating avenue for wealth creation.

The hub of the Nigerian capital market is the Stock Exchange. This is where already issued stocks are traded, thereby creating liquidity i.e. converting financial instruments to cash.

Variation in the price of shares underscores the Nigerian stock exchange market. Every investor wants to earn high returns on investment. In Nigeria, for instance, the investors have no full confidence in their investments in shares. This is because share price volatility affects earnings positively or negatively through the forces of demand and supply of shares.

STATEMENT OF THE PROBLEM

Changes in the demand and supply of shares are one of the reasons responsible for the fluctuation in the price of shares in the Nigerians stock exchange market.

Generally, the information obtained regarding the price of shares will enable investors to take buy or sell decision which may affect the demand and supply of shares. The demand and supply of shares in the secondary market is the indicator used in measuring and forecasting the price of shares. Factors such as earnings volume, dividends, price earning ratios, economic conditions, government policies, manipulation of share prices by the insiders, etc. are attributable to the forces of demand and supply of shares.

This study is aimed at exposing the effect of demand and supply of shares as factors responsible for share price volatility in the Nigerian Stock Exchange Market.

OBJECTIVES OF THE STUDY

Before committing funds on investment, the investor should be able to assess and appraise the investment so as to appropriate investment decision that will increase returns. There are some variables and factors the investor needs to analyze and evaluate in order to take a viable investment decision on financial asset.

These variables include amongst others earnings and share price volatility in the Nigerian Stock Exchange Market.

The following are the objectives of carrying out this study.

  1. To determine how earnings volume affects share price volatility in the Nigerian stock exchange
  2. To ascertain the affect of dividend on share price volatility
  3. To determine the effect of price earning ratio on share price volatility
  4. To compare the degree of relationship of earnings volume, dividend and price earning ratio with share price volatility.
  5. To comment on the vibrancy of the banking industry in the Nigerian Stock Exchange between 2005 and 2010.

RESEARCH QUESTIONS

Based on the objective in mind, three research questions were formulated to direct attention to the study. They are:

  1. Does earnings volume have any significant affect on share  price volatility?
  2. Does dividend have any significant effect on share price volatility?
  3. Does price earning ratio have any significant effect on share price volatility?

HYPOTHESES FORMULATION

To direct focus to this study, three hypotheses have been formed and they are as follows

Hypothesis 1

Ho:   Earnings volume has no significant effect on share price volatility

Hypothesis 2

Ho:   Dividend has no significant effect on share price volatility

Hypothesis 3

Ho:   Price earning ratio has no significant effect on share price volatility.

SIGNIFICANCE OF THE STUDY

The Nigerian capital market performs various functions among which include: rationing scarce resources, acting as facilitator to economic performance, measuring investors’ confidence, ensuring liquidity, engendering capital formation and providing information regarding the price of shares.

Organization’s performance is measured by its share prices, earnings or profits and the dividends it can pay. It is indicated that stock price behaviour is the index for measuring performance in Nigerian capital market. In Nigerian capital market, the security turnover is considered very low and fluctuating in price when compared with the developed nations. It is possible that investors do not have adequate techniques for tackling investment decision which is caused by share price variation. Hence, investors need the best approach to make prediction.

The findings of this study will tremendously help the potential investors to understand and instill confidence in them for their capital invested in financial assets.

THE SCOPE OF THE STUDY

As many of us are already aware, the financial system is the life-blood for any nation-developing or developed. This derives from the recognition that it integrates other systems for balanced economic growth and development in a country.

Share price volatility in the Nigerian capital market is an important and an exciting topic to research on. The “Earning’s volume and share price volatility, a focus on the Nigerian Stock Exchange” covers the quoted banks in the Nigerian Stock Exchange. The United Bank for Africa was selected to represent the entire banking industry with data covering a period of six years (2005-2010).

The study was carried out to meet the current trends and challenges facing investors concerning the variability of share prices in the Nigerian Stock Exchange. The potential investor, prospective investors, students, government, bankers, readers, researchers, the entire society, etc will find this work very useful.

—This article is incomplete———–This article is incomplete———— It was extracted from a well articulated quality Project, Research Work/Material

Project Topic: Earnings Volume and Share Price Volatility, a Focus on the Nigerian Stock Exchange.

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