CHAPTER-3

SHARE PRICE
BEHAVIOUR
3.1 INTRODUCTION

An appreciation in the holdings (value of shares) can take three forms.

First, a simple growth in the market price of shares over a period of

time. Second, a volume growth in the equity held that is a multiplication

in the number of share through bonus issue without accompanied by a

growth in market price of shares and third a volume growth

accompanied by price appreciation. While appreciation in market price

of share is the result of improved financial performance, investors

psychology, market imperfections, or it could be just the inflationary

impact in terms of general risen the stock exchange indices. How ever,

in the race to make the most of the ups and downs in the stock market

(share-price behaviour) bonuses declared by the companies constitute

important milestones.

Earlier empirical findings both substantiate and refute the relation of

share issues with equity price movement. In this chapter an effort is

made to deal with question as to whether the valuation of equity

holdings increases as a result of bonus issue or not. Our study

pinpoints the immediate market reaction to the price behaviour of

shares.

3.2 EQUITY SHARE PRICE BEHAVIOUR IN GENERAL

The purpose of this chapter is the equity share prices have been

observed to move randomly and unpredictably. This implies that the

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market participants take quick cognizance of ail information relating to

security prices and that the security prices quickly adjust to such

information. Gyrations of the stock markets have always perplexed

investors and other market participants, resulting in large number of

theories and hypothesis being propounded to explain the erratic

behaviour of equity prices. The DOW theory, best known as chartist

theory which Works on the presumption, ‘History repeats itself pattern’,

past price behaviour will tend to recur in future. Elite wave theory,

random walk theory and trend analyst, widely used to predict share

price trends and price movement have continued to prove wrong as the

Indian Stock market unrelentingly advance on an unchartered course.

The market participants often seem worried over the price line

movement. They try to speculate or; make meaningful prediction about

share price behaviour either on the basis of past history or by

propounding certain hypothesis or assumptions. Despite loud claims,

there is no logic in share price movement. This is due to the fact that

market does not depend only on the information from one source but it

receives information from number of sources.

3.3 EARLIER EMPIRICAL FINDINGS

Earlier empirical studies have recognized many variables. Desai

(1965)^ found co-efficient of dividend with price significant. Srivastava

(1966)2 observed that dividend has a significant influence on equity

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price. Henry Theil (1967)3 considers investors expectation as the key

variable affecting the price movement. Beavor (1968)4 establishes

significant relationship between price (change) and trading volume.

Sarkar (1971)5 concluded that retained earnings had no effect on share

price while the dividend affects significantly. May (1971)® reports

considerably variability in share price at the time of announcement of

interim or annual earnings and established the fact that more

information arrives the market at the time of earnings announcement,

whereas Ball and Brown (1968)7 Chambers and Penman (1984)8

Foster (1981)8 observed that early earnings releases affect the share

prices.

Ojha (1976)1® argues that the effect of dividend is almost two times

higher than that of retained earnings. Chandra (1978)11 studies the

other variables such as ‘growth in income, risk, leverage and size

besides dividend and price dividend multiplier. His study supported that

returns, growth and size have positive influence on share price while

risk and leverage have no influence at all. Zahir (1982)12 employed five

variables such as dividend per share (DPS), earning per share (EPS),

Book Value Per Share (BPS) cover and yield. His study supported the

view points of earlier studies. Krishna (1984)13 attempted to examines

the empirical relationship between equity price and DPS, EPS, BPS

yield and cover. He concluded that EPS and cover are not important

29
determinants of share price. However, DPS and BPS turned out to be

the significant determination of share price.

Dixit (1986)14 examined the behaviour of equity price ;under the

influence of DPS, EPS, BPS, size and ROI (Return on Investment) as

positive, whereas growth and leverage did not affect the price at all, he

reported. Chawla and Srinivasan (1987)15 suggested dividends and

retained earning as important variables of equity price movement and

found dividend as more effective variable as compared to retained

earnings. Zahir (1992)16 highlighted the significance of both the internal

and external factors causing variations in share prices with reference to

less volatile and more volatile shares.

Mahapatra and Sahu (1993)17 contented that both dividend per share

(DPS) and yield significantly explain the variations in the price of

shares. While dividend per share is found positively significant with

share price, the yield as an investment indicator is found negatively but

significantly associated with the share prices. Their study results don’t

support the view point that in general size, ROI (Return on Investment)

EPS (Earning per Share) BPS (Book Value per Share) are significant

determinants of share price as was disclosed by the other empirical

studies.

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3.4 RECENT TREND IN EQUITY SHARE PRICE MOVEMENT IN INDIA

Stock markets are considered to be the most sensitive barometer

of an economy. They read the signal well in advance, several months

ahead of the “the events. This belief is naturally built on premise that all

information ultimately gets built into stock prices. Though immediate

events influence the markets long term trends are somewhat

independent of immediate aberrations in the equity price movements.

The wild swings in equity price behaviour snatch the investors

breath away. So much so that the many of the market participants

(especially the individual investors) had to quit the market. But are

these security price movements are rational? After all there should be a

reason why the market is swinging. There is a general belief that stock

market behaviour is never irrational. There are always reasons behind

its moods, however, peculiar they might seem.

Over the past several years the events in the stock market have

unabashedly bared it’s many bizarre and the primitive behaviour and

the buccaneer culture. The notion that share price behaviour has been

recurring irrational is true. Recall the situation is mid-1991 then even as

raging gulf war depressed share prices across the world, Indian equities

continued to rise, oblivious of global fears. In sharp contrast, the latest

being the fall in the market in the wake of encouraging corporate of

performance and GDP (Gross Domestic Product) growth.

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There is much misunderstanding about the causes of such irrational

behaviour. For-instance, many including the Patel Committee which

reviewed the ‘badla system’ blamed the ban on carry forward deals to

market decline since September 1994.18 But the real problem is

inefficient price behaviour. A scientific approach required an analysis of

not just the market decline but also the irrational rises. This leads the

one to the general problem of why the share price movement is often

not efficient.

The process of price formation and rational behaviour. An important

question arises, who controls the share price behaviour? Indian stock

market is a heterogeneous collection of long term and short term

investors, traders, speculators, institutions, and individuals well

informed and ignorant participants and the like. As the stock market

price behaviour is the result of interplay among these diverse elements.

What counts most is the element, which dominates the market. The

existence of large mass of punters may increase market liquidity that

makes the market behave erratically. The punters are mostly uniformed

amateur individuals working on tips their participation has establishing

impact on the price line. Studies indicate that the professional

speculators accentuate both upward and downward trend price

movement of shares rather than establishing them. This is because,

when once a price movement starts in particular direction for whatever

reasons, the professional speculators generally go with the

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current, thereby, reinforcing it. Their actions are based not on

assessment of the fundamentals but on mass psychology.

A more disturbing aspect is that many of the professional operators

work in an informal countrywide syndicates on a large scale, in an

orchestrated and aggressive manner. This was demonstrated recently

in connection with the delisting controversy. The event unveiled the

extremely de-stabilizing effect of organized speculative operations on

the whole market. The seriousness of the problem can be gauged from

the fact that the Reliance Industries lodged a formal complaint with

(Security Exchange Board of India) SEBI that a bear cartel was

operating to hammer down the price of its shares. In 1992 Syndicates

of professional market operators were instrumental in boosting share

price to unimaginative height, In short, in a span of five years there

have been at least four significant spurts and equal number of crashes

in the price index. From each crash to boom there has not been a time

lag of more than one and half year on an average. But these spurts and

crashes cannot be attributed to one or two specific factors. If we look at

the Indian stock market behaviour and closely analyze share price

movements we find that there are host of factors both internal and

external and even global factors which bring about ups and downs to

make price line zig zag. These factors may be summarized as under -

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1. Regulatory measures undertaken by SEBI (Securities Exchange

Board of India) erstwhile CCI (Controller of Capital Issues)

including ban and reintroduction of forward trading.

2. Credit Policy of Reserve Bank of India

3. Monetary and fiscal policy of the Union Government including

Budget proposals.

4. Political Stability/Instability.

5. Internal and Overseas Currency Devaluation.

6. Federal Interest Rate.

7. Global business environment and trends in other emerging

markets.

8. Preference and Perceptions of Fils (Foreign Institutional

Investors), and FI (Financial Institutions).

9. Natural calamity such as floods, famines etc.

10. India’s external - debt and liquidity position

11. Overall Corporate performance, practices, prospects

programmes, policies and financial requirements including plans

for corporate merger and acquisitions etc.

12. Managerial manipulations regarding share price rigging, scams

and duplicate shares. Even the development in other economy

(Mexican) including international commodity prices have begun to

influence the Indian share price behaviour.

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To sum up, looking closely at the India’s changing scenario you can

infer that there has been a sharp negative correlation between

corporate profits and stock market price behaviour since introduction of

economic reforms in July 1991. If this behaviour persists there is no

guarantee that the stock market prices will rise even if the coming year

shows an increase in corporate profits.

The fact is that but for the entry of the Fils (Foreign Institutional

Investors) the stock market during the year 1995-96 was, for all the

Indian players a dead market. The irony is, never did the Indian

economy boom so much seldom were the Indian stock markets in a

state of such gloom. The budget (1995-96) was supposed to solve this

paradox, it did not Indeed global finance cannot continue to show

confidence if the Indian players in the stock market are unable to show

the same confidence.

The year 1995 proved to be turbulent period for equity price fluctuated

up and down throughout on the country premier stock exchange (BSE)

due to various factors mentioned above. Even the domestic institutional

investors continued their selling pressure. The common investors were

afraid to invest in the down trend market and adopted a policy of wait

and watch. The Lucklustre capital market has taken its toll on several

public and right issues. Most of the issues especially those made at a

high premium have failed to elicit adequate response and consequently

devolved on the under-writers. Today, meanwhile the biggest

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reason for the dooming market remains unattended - the continuing and

intensified liquidity of scrip’s. So in one scrip after other, the basic

question asked is not the quality of management, dividend or earnings,

or future prospects but the liquidity of the shares. This is destroying the

entire marker the OTCEI (Over the Counter Exchange of India) market

is a tragic proof of it. A recent World Bank study shows if the developing

countries want to progress rapidly, they must have vibrant capital

markets with sustained liquidity.

The study of several emerging stock markets from 1976 to 1993 shows

that countries, which had the most liquid stock market, had the lowest

degree of price volatility. The CMIE (Center for Monitoring of Indian

Economy) study shows that there is heavy speculation in a company’s

share soon after it is listed. The decline in returns after listing indicates

that there is a certain degree of rigging by managements while issuing

equity. They also tend to manipulate the subscriptions and response

data to get higher listing price. Hence the newly listed scripts are very

volatile in the first ten (10) days and volatility drops to mere 25 per cent

of this level by the end of the second week from the date of listing.

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 CHART 3.1 SENSEX VOLATILITY

Table - 3.1 Showing, Sensex Volatility

SI. No. Date Sensex New Base Points grained (+) Percentage changes
Points down (-) (Moving base year) in %
1 31.03.1987 500 100 ■'
2 31.03.1988 435 79.9 -115 -20.91
3 31.03.1989 670 121.81 235 54.02
4 31.03.1990 783 142.36 113 16.87
5 31.03.1991 1168 212.36 385 49.17
6 01.01.1992 1957 355.82 789 67.55
7 31.03.1992 4285 779.09 2328 118.96
8 23.04.1992 4467 812.18 182 4.25
9 06.08.1992 2530 460 -1937 -43.36
10 15.09.1992 3410 620 880 34.78
11 31.03.1992 2280 414.55 -1130 -33.14
12 19.07.1993 2098 381.45 -182 -7.98
13 29.09.1994 4286 779.27 2188 104.29
14 31.03.1994 3779 680.09 -507 -11.83
15 12.09.1994 4631 842 852 22.55
16 31.03.1995 3269 594.36 -1362 -29.41
17 05.05.1995 3069 558 -200 -6.12
18 08.10.1995 3567 648.55 498 16.23
19 25.01.1996 2826 513.82 -742 20.67
20 17.03.1997 4067 739.45 1241 43.91
21 31.03.1998 2821 512.91 -1246 31
22 04.03.1999 3945 717.27 1124 39.84
Source: Daily Official List - BSE

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Therefore, the most important assumption about tracking equity price

movements is that the market discounts every bit of news-even rumour-

publicly known or otherwise. This assumption signifies that the price at

which the security is traded represents hope, fear, inside information,

manipulation, money, muscle power of the market participants and so

on. Hence the important piece of news may be known to only a few

persons (asymmetrical information) which works as a guiding force to

price variations. The above table gives an over all view of sensex

fluctuations for last 10 years from which we can infer the stock price

movements.

What is more stunning that stock market (price) has been defying

even the dictates more soften, from the various factors which are

considered responsible for bringing about price volatility. Neither the

political turmoil/nor the managerial manipulation have brought out the

desired degree of effect on the market sentiments.

Above graph clearly shows that over the last three years the

prices (Sensex) has stayed close to its long-term trend line. This trend

line is giving support to the sensex at the level of 2800. Almost every

one is wondering what magic potion to give the stock market to get it

out of its manic depression. The Government the SEBI (Securities

Exchange Board of India) have tried their level best to boost the stock

market through various measures. The first one being the finance

minister’s directive to chief executives of all banks and

38
financial institutions to take commercial risk by investing in the stock

market is positive step to boost market sentiments. Second,

government’s decision to allow Banks to invest 5% of their incremental

deposits. Besides, the Government has eased its monetary policies to

give more funds to industry, the regulator SEBI (Securities Exchange

Board of India) has moved a few steps back to ease controls over

companies including reintroduction of forward deals, the corporate

sector has performed better than expected present or subsequent

governments are to bound to follow new liberalisation and globalization

policy set-in by the congress government since 1991.

On the other hand, introduction of modern trading practices may give a

sharp fillip to boost sentiments by increasing investment flows. The

dematerialization of shares had got off to a start. This is a very modern

concept whereby shares are traded, taken delivery and paid for through

computers. Right now some of the top scripts have been put in to this

system. The FILs (Financial Institutional Investors) who are not

reluctant may join for paperless stock market (computer system). In

short the preconditions to stock market boom are there yet the bull run

is elusive, despite the Dow Jones industrials setting record after record

and rallying all time high 6547.(1.12.96)

Considering all these factors and government’s keenness to

revive the market, the year 1997 could be a turn around year. The Asia-

Pacific strategy Report states that it is looking to turn more positive

39
on the market as the bad news already discounted. After two dull years

which resulted in many a casualty in corporate circles, the year 1997 is

supposed to start with new hope for investors and corporates.

Of late being the Finance Minister’s budget proposals for 1997-98

which gained immense popularity due to a clear undertone of market

(capital) friendliness and concern for investor’s funds. The government

seems to have redeemed its promise made to investors in January that

the revival of capital markets would receive its special attention.

The impact of allowing buy back of shares, exemption of tax on

dividends in the hands of shareholders, allowing foreign Institutional

Investors (FILs) to invest up to 30 per cent of equity, abolition of

surcharge on corporate tax, dilution of the minimum alternative tax

(MAT) with exemption from its preview for exporters etc. has provided

an unprecedented boost to market-sentiments taking the sensex by 13

per cent or 448 points over a period of week and once again crossed

the 4000 mark during intra-day trading on 5th March, 1997 but couldn’t

hold at these levels as profit-taking emerged and equities dropped on

sustained heavy selling pressure from domestic institutions and

investors. Despite the wide acclaims after fine budget from all quarters,

especially from the corporate sector, there is a need to analyse fiscal

position, which poses several challenges once the euphoria subsides.

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 There will be a need to assess the gains and losses of the far

reaching proposals in the budget and it’s impact on the capital market in

the long-run. Let us wait and watch how the price line behaves’? Surely

it is bound to cross 4500 with in a year and 5000 mark within three

year.

41
 REFERENCES

1. Desai., M., “Stock Prices Earnings and Dividends in India-A

Quantitative Analysis” Indian Economic Journal, (April-June),
1965.

2. Srivastava, S.C., "Stock Prices Dividends and Earnings in India”,

Paper Presented before the Sixth Annual Conference of India
Econometic Society, Dec. 1966, Calcutta.

3. Hennrri Theil, “ Economics and Information Theory’, Chicago and

Amsterdam, Rand Me Mally and North Holland Publishing
Co. 1967.

4. Beaver, W. H., “The Information Content of Annual Earnings”,

Empirical Research in Accounting Selected Studies, Supplement
to Journal of Accounting Research, 1968,pp.67-92.

5. Sarkar, D., “Factors Affecting Industrial Security Prices in India,

50-66”,April, 1971.

6. May, R.G., "The Influence of Quarterly Earning announcements

on Investors Decisions as Reflected in common stock price
changes “, Journal of Accounting Research, September
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7. Ball, R. and Brown, P., “An Empirical Evaluation of Accounting

Numbers “, Journal of Accounting Research Autumn.,
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8. Chambers, A.E., and S.H. Penman, “Timeliness of Reporting and

the Stock Price Reactions to Earnings Announcements”, Journal
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9. Foster, G., “ Intra-Industry Information Transfer Associated with

Earnings Releases” Journal of Accounting the Economics, March
1981,pp.201-232.

10. Ojha, P.R., “Impact of earnings, Retained earnings and

Dividend on share Prices.” Indian Management, Vol.15,
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11. Chandra, P., “Valuation of Equity Shares in India”, Sultan

Chand & Sons, New Delhi(1978).

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12. Zahir, M.A., "Determinants of Stock Prices in India”, The
Chartered Accountant,Vol.30, No.8,(1982)

13. Krishna, B., “Determinants of Equity Prices India",

Management Accountant, Vol. 19, No12 (1984).

14. Dixit, R.K., “Behaviour of Share Prices and Investment in

India, Deep and Deep Publications, New Delhi, (1986.)

15. Chawala, D., and Srinivasan, G., “Impact of Dividend and

Retention on share Prices - An Econometric Study ,”
Decision,(July-September 1987).

16. Zahir, M.A., “Factors Affecting Equity Prices in India,” The

Chartered Accountant, March (1992).

17. Mahapatra, R.P., and Sahu, P.K., “Behavidural of Equity

Share Prices in India - A Micro Time-Series Study" Finance
India., Vol. VII., No.3 (September. 1993),pp.573-586.

18. Economic Times, dated November 14,1994.

19. Times of India, dated December 2,1996.

20. Economic Times, dated November 14,1994.

21. Economic Times, dated Decemberr 13,1995.

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