The research regarding relationship between companies' performance and stock price movements has been done in previous study by Lamont(1998), Shiller (1984), Fama and French (1988), and Sivakumar and Waymire(1993) but the results of the studies are not conclusive. This paper extends this line of research into the Sarawak, Malaysia stock market, which has experienced significant growth since the Malaysia Stock Exchange opened on 1964.
The impact of company's annual performance on the price movement of the stock to be an important research question in this research . Some companies enjoy high price of earnings ratio and other growth measures, while these measures were insignificant for some companies. In other words, the investor needs to consider other factors that may influence stock price movement besides companies' annual performance. Investors should consider whether the companies share is a good value, it is not always that the stock should always be purchased because the company's performance is good and sold the company's stock because its performance is bad.
This research attempt to examine the relationship between companies' performance with stocks price movement on different industries of companies. It is apparently that there are extremely wide day-to-day changes in the price quote on most of the stock exchanges. It is not possible to say whether it is economic or psychological realities which are the major causes of the price fluctuations in the stock markets. This is an important issue, as it brings into account the analyzing the annual performance of companies and the price movements of the shares of that particular companies to the investors.
1.1.2 Definition of Stock Price
Financial theorists define stock price at the present value of all future earnings expectation of the company, dividend by this number of shares outstanding. In other words, the earning capacity of the company is what defines the price. Often, companies can get significant value out of a relatively small investment in the assets because the ability for those assets to make money is significant. The companies which lose money today also will have a high share price because price is based on the future earnings of the company. In business, no company will willing continuous lose money, so the expectation is that every business will make money in future. So long as there is a potential for the future revenue streams to shareholders, there will be a price there someone will pay for the shares. The earnings that a company could make in the future, the growth that the company could realize and the time to the realization of those goals are factors which affect the estimate that market makes on the earnings potential.
1.1.3 The Market Mechanism
The value of the publicity traded stocks is liquidity. Publicity traded companies are worth more than private ones simply because there is greater access to buyers and sellers, and market efficiency can better determine share price. The stock market provides value to any company that chooses to list its shares because the company gains liquidity. In a theoretical sense, any time someone buys the shares of the company in the market, they are effectively stating that they believe the shares of the company are undervalued. The fact that they are buying implies a belief and expectation that the shares will increase in the future. At the same time, the person who is selling the share is experiencing the opposite belief. By selling, they imply that the stock is overvalued and the expectation that the stock will go lower in the future. In this way, the stock market is forum for debate on what the value of the company and its stocks.
1.1.4 Reasons for the Stock Price Movement
There are various reasons for the price movement of the stocks. One of the reason is the market expects the earnings to rise rapidly in the future. For example a gold mining company which has just begun to mine may not have made money yet but next quarter it will most likely find the gold and make a lot of money. The same reason applies to pharmaceutical companies often a large amount of their revenue comes from the best few patented products, so when a promising new product is approved, investors may buy up the stock.
On the other hand, there are four factors that cause movements in stock price.
a. New information
b. Uncertainty
c. Psychological factors
d. Supply and Demand
a. New information
Information is the key as it gives the market a reason to value a stock at a particular price level. The market will price the stock based on all the information that the public is aware of. As new information comes into the public, the market will adjust the prices up and down based on how the market perceives. In other words, the information will affect the future earnings capacity of the company.
Technical analysis is very important because it provides tools that allows investors to identify the signs that new information is been stocked into the market before the news is released. Stocks that trade abnormally often do so because of the significant new information, both positive and negative. In this way technical analysis helps to reveal fundamental changes in the company before the broader market is aware of it.
b. Uncertainty
The uncertain future of the company will bring some volatility in stock prices even during a period in which there is no new information. Companies that have established a performance record will tend to show less volatility as determined by uncertainty. Generally, a company which is well established with many years of revenues, will show less volatility then an upset company that has not yet had an opportunity to establish a track record of revenues and earnings. These stocks will trade difficultly and will provide different kinds of trading opportunities because of uncertainty.
c. Psychological factors
Humans are behind the activities of the trading market. That means human characteristics are also factors in how stock prices move. Understanding human psychology is extremely important in evaluating investment opportunities because human psychology creates and accentuates many of the opportunities that investors can capitalize on. For example greed often causes stocks to go higher than they deserve to go. By deserve, they may go higher than the present value of the future earnings potentials can justify. New information can cause a freeze in the market that makes investors lose sight of rational valuation and simply buy for the fear of being left behind. Fear and greed present incorrect valuations in the market that can exist relatively for a short period but long enough for smart investors for capitalizing on. Emotion in the market can be viewed for the amplification pulled and the stocks moves back to where it should reside based on the information of the company.
d. Supply and Demand
Popular stocks such as dell and general motors trade millions of shares every day, the majority of the stocks that we can choose to invest do not have much liquidity. As a result stocks that trade smaller value of shares are subjected to fluctuation because of supply and demand. If a large share holder wants to sell a large number of shares into the market with weak liquidity, the share holder can dramatically move share price. Therefore, supply and demand can take the short term balance out of the market and present opportunities for investors to see that the balance is restored. Investors can anticipate abnormal supply and demand. As information about the company's prospects is made public, prices will change. Uncertainty of the failure can bring added volatility which psychological factors can amplify the effect of new information. Finally supply and demand can cause fluctuations not motivated by new information.
1.2 Problem statement
From the previous studies, the results show that there is positive relationship between companies' financial performance and its stock price movement. However, there are other main factors that affect companies' stock price movement also such as market sentiment , corporate governance , take over or merger , new company product introduction to the market or new major contracts or major government order. Waymire(1993) find that the firm's operating performance can explain a significant portion of the stock price movements but Lev (1989) conducts a review of several studies on the information content of earnings and reports that earnings changes are only weakly related to period stock returns and that the operating performance is not significantly related to period stock returns.
1.3 Objectives of the study
1.3.1 General Objective
The purpose of this study is to find out whether the companies financial performance will bring the impact on the companies' stock price movement for the Sarawak listed companies.
1.3.2 Specific Objectives
To determine is it positive relationship between companies' financial performance and stock price movement.
To identify other factors that may influence companies' stock prices movement also.
1.4 Rational of the Study
The study will examine the relationship between firm financial performance and stock price movement for the Sarawak listed company. It is to determine whether Sarawak listed company financial performance will direct influence stock price movement .This study is important to the investors. Stock price movement information is important for investors. By know the actual factors that influence stock price movement, investors can take advantage by deciding whether to go long or go short on their portfolios. Besides, stock market is one of the important sources for companies to get return and raise additional income. The information in this study will then important to companies or even stakeholder.
1.5 Scope of study
In this study, Sarawak, Malaysia listed companies will be selected to conduct this study. The companies which are selected randomly are all form first board of Bursa Malaysia and are different industries. All the collected data are from 2005 till 2009 financial years.
1.6 Conceptual Framework
Figure 1 : Conceptual framework of the study
Independent variables
Financial performance
(Financial ratios measurement)
Return on equity ( ROE )
Earnings per share ( EPS )
Return on invested (ROI)
Dependent variable
Companies'stock prices (yearly)
Based on figure 1, the conceptual framework for the study is as follow :
The independent variables of the study are the three financial ratio as show above, return on equity, earnings per share and return on invested. These three ratios will be used to measure the financial performance of selected Sarawak listed companies. While, the dependent variable are the yearly stock prices of selected Sarawak listed companies. Thus, this study will be determined whether the companies' financial performance will have positively relationship with companies' stock price movement.
