Share prices are used as proxies to signal the overall strength and financial health of a company. In addition, share prices also inform the public on management’s performance. Empirical evidence suggests that changes in share prices (stock returns) are affected by various factors/determinants. Knowledge of these factors will convey valuable information to management in general and financial managers in particular in order to enhance their firm’s value. These factors will be also of importance to investors as it will enable informed decisions before investing in any particular firm. In addition, these factors include internal and external variables. For example: a company’s stock return could be affected by company’s specific variables such as profitability, dividends, leverage, size etc. and macroeconomic variables such as inflation rate, exchange rate, interest rate, GDP etc. The extent of this effect is also determined by whether or not the company operates in developed or emerging markets.
You are required to:
a) Using a cross-sectional regression model, estimate the effect of firm-specific variables and macroeconomic variables on firms’ stock return for the last 10-year period up to 2017/18 (subject to data availability). Explain your results. (70 marks)
b) Compare and contrast your results with previous studies. You need to explain whether or not the results are different between developed and developing markets. Support your answer with appropriate evidence. (30 marks)
Word limit: 1500 words