THE IMPACT OF FINANCIAL RATIOS ON STOCK MARKET RETURNS OF SOME SELECTED NIGERIAN QUOTED COMPANIES
ABSTRACT
This study examines the extent of impact of a broad range of finance based ratios on stock market returns of some selected food and beverages firms quoted on the floors of the Nigerian bourse (stock exchange). The finance based ratios utilised include earnings per share ratio (EPS), Price earnings ratio (PE), Market to Book Value ratio (MBV); while Book Value ratio was utilised as a control variable. Using daily stock market returns data for a time frame that ranges from financial year ended 2008 to 2013, the study applied the multiple regression methodology, which enables easy analysis of the impact of a set of independent variables (regressors) on a selected dependent variable (regress and) with particular emphasis on the Nigerian stock market.
The result showed that earnings per share (EPS) ratio has a mixed result of significant and insignificant impact on market returns performance of the firms. The study further revealed that there exist an insignificant relationship between Price to Earnings (P/E) ratio and Stock Returns of Nigerian publicly quoted food and beverages companies. The study further revealed that the effects of Market Value to Book Value (MBV) ratio on Stock Returns of the selected publicly quoted companies are significant.
             Overall, the empirical findings generally support the view that market based financial ratios do have some rather weak impact in the stock market returns of a frontier market such as that of Nigeria. The study recommends that Nigeria should strive to develop and implement detailed capital market master plans and country specific financial market reforms. In particular, such reforms should be guided by the adoption of international best practices, and standards covering issues such as banking system regulation and supervision, data dissemination in the financial market, corporate governance and transparency in monetary policies.
TABLE OF CONTENT
CHAPTER ONE:    INTRODUCTION
1.1    Background to The Study                            
1.2    Statement of Research Problems                    
1.3    Research Questions                                
1.4    Objectives of The Study                            
1.5    Research Hypotheses                            
1.6    The Scope of The Study                            
1.7    Significance of The Study                            
1.8    Limitations of The Study                            
1.8.1    Definition of Terms                                
CHAPTER TWO: LITERATURE REVIEW
2.1        Introduction                                
2.2    Theoretical Review                                
2.2.1     The Efficient Market Hypothesis                    
2.2.2     Variants of the Efficient Market Hypothesis        
2.2.3     Implications of the Efficient Market Hypothesis    
2.2.4   Market-based Financial Ratios                     
2.3    Empirical Review                                 
2.3.1    EPS  and  Stock Returns                             
2.3.2    Price Earnings Ratio P/E and Stock Returns             
2.2.3   MBV and Stock Returns                                 
CHAPTER THREE: METHODOLOGY AND MATERIAL
3.1     Introduction                                    
3 .2     Research Design                                
3.3    Population and Sample Size                        
3.4     Model Specification                                
3.4.1    Stock Return Model                            
3.4.2    Operational Measurement of Variables             
3.4.3    Test for Time Series Properties                        
CHAPTER FOUR: EMPIRICAL ANALYSIS
4.1     Introduction                                    
4.2     Descriptive Statistics                            
4.3     Regression Results For The Selected Companies        
4.3.1    Regression results for Dangote Flour Mills PLC
4.3.2    Regression results for Dangote Sugar Refinery PLC                
4.3.3    Regression results for Honeywell Flour Mill Nigeria PLC            
4.3.4    Regression Results for Honeywell Floor Mill Nigeria PLC            
4.4     Test of Research Hypotheses                
4.4.1    Hypothesis One                            
4.4.2    Hypothesis Two                    
4.4.3    Hypothesis Three                        
4.5    Policy Implications                                
CHAPTER FIVE: SUMMARY OF FINDINGS, CONCLUSIONS AND RECOMMENDATIONS
5.1    Introduction                                    
5.2    Summary of Findings                            
5.3    Contribution to Knowledge                        
5.4    Conclusions                                    
5.5    Recommendations                            
Bibliography                                    
Appendix                                     
LIST OF TABLES
Table 4.1a:    Descriptive Statistics for Dangote Flour Mills PLC            
Table 4.1b: Correlation Analysis for Dangote Flour Mills PLC    
Table 4.2a:Descriptive Statistics for Dangote Sugar Refinery PLC            
Table 4.2b: Correlation Analysis for Dangote Sugar Refinery PLC            
Table 4.3a:Descriptive Statistics for Flour Mill Nigeria PLC    
Table 4.3b: Correlation Analysis for Flour Mill Nigeria PLC            
Table 4.4a: Descriptive Statistics for Honeywell Flour Mill PLC            
Table 4.4b: Correlation Analysis for Honeywell Flour Mill PLC    
Table 4.5: Regression Result for Dangote Flour Mills PLC    
Table 4.6: Regression Result for Dangote Sugar Refinery PLC    
Table 4.7: Regression Result for Flour Mill Nigeria PLC
Table 4.8: Regression Result for Honeywell Flour Mill Nigeria PLC.        
CHAPTER ONE
INTRODUCTION
1.1    BACKGROUND TO THE STUDY
The conviction to investigate the impact of market-based ratios on stock returns of companies listed on the Nigerian Stock Exchange is premised on the fact that for every organized capital market, information (of a financial nature) is among the most crucial factors that determine financial market efficiency (Zeytinoglu, Aquarium & Celia, 2012).According to Emamgholipour, Pouraghajan, Tabard, Haghparast & Shirsavar, (2013), the main purpose of investing in the stock of companies is to buy into the future of a company and increase wealth. This, they assert, is achieved through consistent increases in the selected stock returns. It is therefore not an unusual occurrence that investors in financial markets do increase or decrease their stock holdings and profit level according to the impact of information on stock prices (Zeytinoglu, Aquarium & Celia, 2012). Perhaps, this may be the reason why Emamgholipour et al (2013) opine that in order to be able to achieve stock returns more efficiently and with less risk, an investor needs information about  that stock. Stock return, according to them is one of the most important factors in choosing a best investment option from amongst competing alternatives. To Zeytinoglu et al (2012), stocks are the most preferred investment instruments since they provide higher returns than numerous other possible investment outlets.
As noted by Zeytinoglu, Aquarium & Celia (2012), in an efficient market one cannot use the existing information in the market to make profit, information gathering from financial statements becomes the basic information which investors use in making stock investment decisions.
Emamgholipour et al, (2013) pointed out that the information that exists about a company’s stock captures both internal and external circumstances of that company. The Internal circumstances of a company are reflected by the information in its financial statements. External information of a company also exists in the stock market. According to Merida Pour and Mosaic (2009), the external and internal information have effect on invests’ stock decisions.
According to Emamgholipour et al (2013), investors have to consider various factors during investments in stocks, because they intend to convert their liquid (cash) assets to stocks. Therefore, in any investment, with relevant financial ratios especially investment ratios, computed from the financial tables, rational investors seek the possible ways by which they can get abnormal returns. They also seek to get information from the future amount of stock returns of companies (Emamgholipour et al, 2013; Zeytinoglu et al, 2012).As pointed out earlier, one of the most common methods of analyzing financial information to facilitate stock investment decisions (among others) is to prepare financial ratios. Namazi and Roostami (2006) assert that financial ratios are a summary of financial reports of companies, which provide much information content from the internal situation of companies. This assertion seems to imply that investors can make and even reverse or adjust their investment decisions following the information portrayed by the financial ratios from a company’s financial statements.
Irrespective of Namazi and Rostami’s assertion, and since Efficient Market Hypothesis holds that investors cannot obtain returns in excess of the normal returns, it is convincing to find out whether market-based ratio have any impact on the stock returns of investors in the food and beverages sub-sector of the Nigerian stock market. Thus, the question “are market-based ratios important predictors of stock returns?” remains unanswered. Whether they are or not, is an expected output of this study.
1.2    STATEMENT OF RESEARCH PROBLEMS
Numerous empirical studies have appeared in recent years concerning the behavior of stock market returns and its determinants. While a few writers believe that certain price trends and patterns exists to enable the investor to make better predictions of the expected values of future stock market price changes, the majority of these studies conclude that past price data alone cannot form the basis for predicting the expected values of price movements in the stock market (Erika & Idol or, 2009).
Indeed the prediction of stock returns due to changes in some other extraneous variables still continue to pose a major challenge in the literature to date. This has been as a result of a lack of appropriate data for statistical analysis, lack of technical skills to effectively utilize available statistical tools and a lack of in-depth research into that aspect of the capital market. Many futile attempts have been made to predict stock returns in the past. Analysts have used fundamental and technical approaches and more tools are being evolved in the literature to deal with this aspect of the stock market. All the attempts are to see if an investor can beat the market and reap a windfall. The success of such analytical tool would lead to an upward trend in the stock market and further lead to market vibrancy and economic growth and development.
Furthermore, a great majority of such research studies have been conducted using aggregate data of the entire stock market, without any specific consideration of the impact on specific sub-sectors of the stock market. Moreover a great majority of previous research studies have been focused more on the developed capital markets leaving those centered on an emerging/frontier capital market like Nigeria, few and far in between. In this light the background to the study brings into lime light the curiosity of the researcher to examine the impact of a set of market-based financial ratios (or information) on the stock returns of companies listed the food and beverages sub-sector of the Nigerian market.
1.3    RESEARCH QUESTIONS
The following research questions emerged against the background of the statement of the research problem to guide the researcher in the study.
1.    To what extent does earnings per share (EPS) determine equity return performance in Nigerian publicly quoted firms?
2.    Is there a significant relationship between Price Earnings (P/E) ratio and equity returns of Nigerian publicly quoted companies?
3.    To what extent does Market Value to Book Value (MBV) ratio determine equity returns of Nigerian publicly quoted firms Return?
1.4.1    OBJECTIVES OF THE STUDY
The broad objective of this study is to investigate the impact of a set of market-based financial ratios on Stock Returns of companies quoted on the Nigerian Stock Exchange (NSE). Directly derived from the broad objective are the following specific objectives:
1.    determine whether there is significant relationship between Earnings Per Share (EPS) and Stock Returns;
2.    ascertain if there is significant relationship between Price to Earnings (P/E) ratio and Stock Returns;
3.    determine if there is a significant relationship between the ratio of Market Value to Book Value (MBV) and Stock Returns.
1.5    RESEARCH HYPOTHESES
 In order to proffer answers to the research questions and achieve the objectives of the study, the following three hypotheses stated in their null form are posed.
 H01: There is no significant relationship between Earnings Per Share (EPS) and Stock Returns of Nigerian publicly quoted firms.
H02:  There is no significant relationship between Price to Earnings (P/E) ratio and Stock Returns of Nigerian publicly quoted companies
H03:    There is no significant relationship between the ratio of Market Value to Book Value (MBV) and Stock Returns of Nigerian publicly quoted firms.
1.6       THE SCOPE OF THE STUDY
 Geographically, our scope is limited to the food and beverages sub-sector of the Nigerian equity market (bourse). Temporarily, the scope is limited to a time frame that ranges from financial year ended 2008 to 2013. Our subject matter scope is on the impact of a set of market based financial ratios on stock market returns of some selected firms in the food and beverages sub-sector of the stock market. The concept of Market-based Financial Ratios is loosely used in the study to refer to a set of financial information derived from financial statements; that can serve as a veritable tool for monitoring stock price trends and behavior in the capital market. The time period covered by the study is considered long enough to assure the adequacy of data and reliability of results as the data was kept at both daily and weekly interval.
1.7          SIGNIFICANCE OF THE STUDY
As noted by Sahib (2012), the relevance of a study relates to whether the study contributes to knowledge or not, and its significance connotes the magnitude of its relevance or contribution to knowledge. Thus, the findings of this study will be important and useful in the formulation and implementation of stock investment policies and strategies, investment portfolios, and other investment decisions as well as a basis for further related studies. It will also contribute to the on-going debate on market efficiency and company fundamentals especially as it relates to the Nigeria Stock Exchange.
1.8      LIMITATIONS OF THE STUDY
In general, the depth and thoroughness of this research was greatly constrained by some factors which were beyond the control of the researcher. The parameter values once incorporated within the regression model framework are assumed to be constant. This implies that the estimated coefficients are time-specific in nature and tend to be silent on breaks that may occur in the system. However, in reality financial markets are dynamic and market conditions change continuously with time. The regression model framework does not completely capture these shifts in market conditions; and this therefore forms a part of the limitations of the study.
Furthermore, the sample size considered in this study is too small as its emphasis is on Nigeria alone as the focal point of the study; rather than on a larger sample consisting of many countries within and outside Africa. Besides, the fact that we resorted to the use of secondary data implies that we are faced with the biases and imperfections that often plague the use of secondary data worldwide. However these limitations do not significantly affect the quality of the findings and conclusion reached by the study.
1.8.1    DEFINITION OF TERMS
Market-based Ratios:  These refer to investment ratios. They are tools derived from the financial statements of firms and could be used by investors to monitor stock returns trends and behavior in the capital market.
EPS: this refers to the distributable profit per unit of ordinary share
P/E: this refers to the ratio of market price per ordinary share to the distributable profit per ordinary share
MBV: this refers to the ratio of the current market value the public attach to an ordinary share, to the nominal value of the share.
Stock returns: this refers to the proceeds from investing in equities for the current and future period. It is the sum of capital gain and dividend received on investment in stock, usually expressed in percentage.
Financial market efficiency: a situation whereby a financial market is perfect and not being characterized by information asymmetry
EMH:  Efficient Market Hypothesis is the theory that assumes financial markets are characterized by information symmetry and hence, investors cannot use the existing information to make abnormal profits.
Abnormal returns: these are returns in excess of the average market returns on stock in the capital market.
NSE: Nigerian Stock Exchange
NPV: Net Present value
SEC:  Securities and Exchange Commission
CAPM: Capital Asset Pricing Model.