ASSESSMENT OF STOCK MARKET RETURNS OF SOME SELECTED PHARMACEUTICAL COMPANIES IN NIGERIA: APPLICATION OF FINANCIAL RATIOS
ABSTRACT
The aim of this research work is to investigate the impact of financial ratios on stock returns of pharmaceutical companies taking from the non-financial quoted companies in Nigeria from the year 2008 to 2013. Five financial ratios were selected which include earning yield (EY), price to earnings (P/E), dividend yield (DY), earnings per share (EPS) and return on asset (ROA) which have been documented to predict stock returns. Different analysis such as descriptive statistics, correlation matrix and the ordinary least squared (OLS) techniques where performed to estimate the predictive regressions in the form of multiple models of panel data sets. The regression results indicates that earnings per share (EPS) and return on asset (ROA) ratio have negative but statistically insignificant relationship with stock returns of current and future year, while   earning yield (EY), price to earnings (P/E) and dividend yield (DY), had positive but insignificant relationship with stock returns of current and future year. None of the relationships were statistically significant at 0.05 level of significance.  The tests of the statistical significance of the model (i.e. goodness of fit test) indicates that the explanatory variables were jointly insignificant in explaining variation in stock return of current and future year. Nigeria should therefore strive to develop and implement detailed capital market master plans and transparency in monetary policy.
    CHAPTER ONE
                               INTRODUCTION
1.1    BACKGROUND TO THE STUDY
    Knowledge on the relationship between the financial ratio and stock returns is crucial to the investors in the equity market as well as to the policy makers. The main reason for investing in companies stock is to increase the wealth of investors which is achieved through stock return. Stock return is one of the most important factors in choosing the best investment. In any investment, investors are seeking to obtain returns and trying to get information from the future amount of stock returns of companies. Emamgholipour, pouraghajan, Tabari, Haghaparast and Shirsavar (2013) pointed out that in order to be able to achieve stock more efficiently and with less risk, an investor needs information about that stock. Inyiama and Ozouli (2014) stressed that the effectiveness and efficiency of management decisions could be appraised in the light of the impact on the firm’s stock price. The success or failure of management decision can be evaluated only in the light of the impact of firm stock prices (Remi, 2005). For the investors, predicting the stock return and key financial variables could help them to appropriately forecast stock price movement. The prediction of stock returns within a stock market has been analyzed by (Ajao & Wemambu , 2011) as the act of trying to determine the future value of a company stock or other financial instruments traded on a financial exchange. The successful prediction of a stock’s future return/price could yield significant profit. Some believe that stock price movement are governed by the random walk theory and thus unpredictable. Others disagree and have proffered various methods and techniques which purportedly allow them to gain future price information. Within the last two decades, a great deal of attention has been focused on the idea of predicting stock prices and price fluctuations (Wojciech cited in Ajao & Wemambu, 2011). In this regard, a look at the degree or extent to which already existing theories have effectively succeeded in predicting stock prices will be imperative.   
1.2 STATEMENT OF RESEARCH PROBLEM
Goyal and Welch (2003) asserts that most variables would not be able to help investors in predicting equity premium mean. Hijalmarson (2004) found that financial ratios are not useful in predicting the Malaysian stock return. This research work therefore stands to find out the most accurate variables for predicting stock returns in Nigeria.
1.2.1    Research Questions
The study therefore attempt to find answers to the following specific questions:     
To what extent does earning yield (EY) significantly affect stock return?
Is there a relationship between price to earnings (P/E) ratio and stock return?
Is there any significant relationship between dividend yield (DY) and stock return?
Is there any significant relationship between earnings per share (EPS) and stock return?
To what extent does return on asset (ROA) affect stock returns in Nigeria?
1.3    OBJECTIVE OF THE STUDY
    The broad objective of this study is to examine the impact of financial ratios on stock returns of quoted companies in Nigeria. More specifically, the objectives of the study are stated as:
To establish whether earning yield (EY) can affect stock returns.
To determine the relationship between price to earnings (P/E) ratio and stock returns.
  To ascertain if there is any significant relationship between dividend yields (DY) and stock returns.
To examine the impact of earnings per share (EPS) on stock returns.
To verify the effect of return on asset (ROA) on stock returns.
1.4    RESEARCH HYPOTHESES
To undertake an empirical assessment of the impact of financial ratio on stock returns in the Nigeria, we formulate the following hypotheses;
Hypothesis 1: There is no significant relationship between earning yield (EY) and stock return.
Hypotheses 2: There is no significant relationship between price to earnings (P/E) ratio and stock returns.
Hypothesis 3: There is no significant relationship between dividend yield (DY) and stock return.
Hypothesis 4: There is no significant relationship between earnings per share (EPS) and stock returns.
Hypothesis 5: There is no significant relationship between return on asset (ROA) and stock returns.
  1.5    SCOPE OF THE STUDY
The study examined the impact of financial ratio on stock returns of non-financial quoted companies in Nigeria by focusing on different variables like   earnings yield (EY), price to earnings (P/E) ratio, dividend yield (DY), earnings per share (EPS) and return on asset (ROA) as can be obtained from the Nigeria fact book. The study covers the period from 2008-2013 using panel data analysis. The data of four (4) quoted companies from the pharmaceutical industry in Nigeria were collected.
1.6    SIGNIFICANCE OF THE STUDY
The findings of this study will be of importance to various stakeholders who are interested in investing in the capital market at large. The capital market plays a very significant role in the economic growth of a country. According to Schrimpf (2010), there is significant economic aftermath of the existence of stock return. This study therefore significantly focused on how financial ratios can predict the stock returns in the Nigeria Stock Exchange. It will also provide information that is useful particularly to external users in making credit and investment decisions. The study is also beneficiary to investors who might be interested to know which direction share price would go and by what percentage. The study would serve as a reference point for future researchers who wish to carry out further studies on this topic. This study will revise, extend or create new knowledge, because developing countries like Nigeria have different institutional structures from developed economies.
 1.7    LIMITATION OF THE STUDY
    In every research work, there are constraints. This study only considered the impact of some few explanatory variables on stock returns. It may not be possible to take into account all the variables that explain stock returns, this limiting factor provides a nexus for the empirical results of not to be one hundred (100%) percent reliable. The study is also limited to the Nigeria Stock Exchange. The inability of the researcher to cover the whole population of the industry consigned, which is too large is another limitation    
1.8    DEFINITION OF TERMS
Dividend Yield: This is the return that an investor expects to earn from the profits distributed as dividends annually to investors. It indicates how much, in terms of payout, the investors would receive in relation to other investments.
Earnings yield: Earnings yield is the return that an investor expects to earn on his investment and it is express as the proportion of earnings per share to stock price per share.
Earnings per Share: This refers to a corporation’s accounting earnings divided by the number of its common shares outstanding.
Financial Ratio: Financial ratio refers to the measurement of the amount of investments on assets and how much such asset brings as revenue.      
NSE: Nigeria Stock Exchange.
Price Earnings Ratio: Refers to ratio of market Price to earnings per shares.
Return on Asset: Managers often measure the performance of the firm by the ratio of income to total assets (income is usually defined as earnings before interest but after taxes).
Stock market: The stock market is a complex institution with mechanisms through which intermediate term long term funds are pooled and made available to business government and individuals.    
Stock Returns: This refers to the sum of capital gain and dividend received on investment in stock, usually expressed in percentage.
SEC: Security and Exchange Commission