DETERMINANTS OF EQUITY SHARE PRICES IN INDIAN

CORPORATE SECTOR-AN EMPIRICAL STUDY

Dr.Balwinder Singh*
Shefali Sharma**

Abstract
The present study attempts to examine the empirical relationship of explanatory
variables namely, dividend per share, earnings per share, price-earnings ratio, book value per
share, size, cover, return on capital employed and payout ratio on market price of the shares in
the post-reform era of liberalization. The relationship between independent and dependent
variables of 160 companies is studied over a period of five years ranging from 2001 to
2005.The results revealed that Earnings per share and book value per share are important
determinant of share price as they are an index of the sound financial position of the companies.
Dividend per share is important determinant of share price, which shows that the companies
should adopt a liberal dividend policy to activate the primary as well as secondary market. A
high dividend rate may also help in increasing the market price and result in high capital
appreciation to the shareholders as depicted by payout ratio and cover. Price-earnings ratio too
showed investors’ expectation about the growth in the firm’s earnings that varied from industry
to industry.

Keywords: Determinants; Fundamental variables; Share Price; Financial reforms.

*Reader, Department of Commerce & Business Management, Guru Nanak Dev University, Amritsar. Punjab-143005.
E-mail: bsssaini@yahoo.com
**Junior Research Fellow, Department of Commerce & Business Management, Guru Nanak Dev University, Amritsar.
Punjab-143005. E-mail: shefalidear_19@yahoo.co.in

1
 Introduction
Share price is the most important indicator readily available to the investors for their
decision to invest or not in a particular share. Theories suggest that share price changes are
associated with changes in fundamental variables which are relevant for share valuation like
payout ratio, dividend yield, capital structure, earnings, size of the firm and its growth [Wilcox
(1984), Rappoport (1986), Downs (1991)].
Investigations of share price changes appear to yield evidence that changes in
fundamental variable(s) should jointly bring about changes in share prices both in developed
and emerging markets. However, the actual fundamental factors found to be relevant may vary
from market to market. The changes in asset growth of firms are significant in case of Japanese
shares while earnings appear to be universally a relevant factor (Ariff et al., 1994). However, it
is widely agreed that a set of fundamental variables as suggested by individual theories is no
doubt relevant as possible factors affecting share price changes in the short and the long-run
(Ariff and Khan, 2000).
Knowledge of relative influence of fundamental factors on equity share prices is helpful
to corporate, management, government and investors (Chandra, 1981). To the corporate
management an understanding of the valuation mechanism in stock market is essential for the
sound financial management of the company. An understanding of determinants of share prices
is useful in the formulation of management policies relating to dividend payment, bonus
declaration, right issues, etc. Investors can also form better judgments and make intelligent and
rational investment decisions (Sachdeva, 1994, p.5). Investors in shares usually make constant
use of these various variables for gauging the relative merit of a script. These calculations are in
no sense, final determinants of equality and value but they are convenient indicators about the
performance of equity shares in market (Dixit, 1986, p.86).
Due to liberalization, privatization and globalization, Indian capital market has
witnessed considerable changes in 90’s and 2000’s. As a consequence, the relative
importance of the variables determining the share prices has also undergone some changes.
All these developments have increased the importance of striving towards the basic goals of
financial management i.e., maximizing the price of firm’s common stock and therefore
shareholders wealth (Vanhorne, 1978, p.7). For a firm whose equity shares are actively traded
on the stock market, the wealth of equity shareholder is reflected in its market value. Hence,
the goal of financial management for such firms should be to maximize the market value of
equity shares (Chandra, 1986, p.6). The decade of 1990’s i.e., post reforms era has witnessed

2
radical changes in public policies in India that can be expected to have an effect on the
environment within which firms operate (Khanna, 1999; Pal, 2001). The financial sector also
experienced deregulatory initiatives in the form of unfreezing of interest rate controls and
public policy initiatives to encourage the growth of financial markets – for both equity and
debt (bonds) instruments. Decisions located within the boundaries of the firm therefore, play
a greater role in driving the equity share prices, under the new policy regime (Kakani et al.,
2001).
It is important to study factors effecting share prices in India after introduction of
reforms, which emphasized more towards openness to foreign trade and competition. The
objective of this study is to investigate the joint effect of fundamental factors on equity share
prices of Indian companies. Further discussion has been divided into four sections. Section
one appraises the review of literature. Section two describes the database and research
methodology designed for the study. Section three deals with explanation of company
performance variables. Section four shows analysis and interpretation of regression Results.
Finally, section five concludes the findings.
Section – I
Review of Literature
A number of empirical studies have been conducted in India and abroad on the
relationship between equity share price and fundamental variables These studies have been
reviewed to identify the gap that exists in the literature in this area. The review has been
divided into two parts namely; Indian studies and foreign studies.
Indian studies:
Desai (1965) examined the impact of dividend per share, retained earnings per share
and earnings per share on the market price per share by using linear regression model. He
used a sample of 31 Indian companies during the year 1960. The results indicated that current
dividends were the best explanatory variable for stock prices while earnings and retained
earnings were found to be satisfactorily insignificant. Srivastava (1966) conducted a study on
six industries namely; cotton-textile, tea, sugar, electric, coal and paper for the year 1961. The
study observed that dividend had a strong impact but retained earnings had no significant
influence on share prices in India.
Ojha (1973) conducted a study of cotton-textile industry using a sample of 14
companies for the year 1961. He observed that dividend had the most powerful effect on
share price that was two times higher than retained earnings. Chandra (1981) conducted a
3
study relating to two groups of companies; ‘across the board group’ which consisted of 50
shares drawn at random from a group of 110 shares of firms in all the industries except
banking, insurance, and textile and 30 shares of ‘cotton-textile group’. The main findings of
the study indicate that returns, growth and size, had a positive influence on share price while
risk and leverage had no influence on share price.
Zahir and Khanna (1982) conducted a study of 62 private sector giants for two years,
i.e., 1976-77 and 1977-78. The results indicated that dividend per share had significant impact
on share prices. The coefficient of cover and price earning ratio was insignificant whereas
yield was highly significant in both the years. Dixit (1983) conducted a study of 42
companies for a period of 20 years i.e. 1961-1982. Dividend and earnings turned out to be
most significant predicative variables whereas growth and leverage appeared to be redundant
variables. Return on Investment had comparatively weak influence on share price. Bal
Krishan (1984) applied correlation and multiple linear regression techniques on 22 firms for
the year 1982-83. Out of five variables, dividend per share turned out to be the most
significant determinant of market price whereas earning per share and cover remained
insignificant.
Malhotra (1987) conducted a study of four industries, namely general engineering,
cotton textile, food products and paper covering a period of four years from 1982 to 1985.
Dividend per share and earnings per share had positive and significant influence on market
price of equity share. Yield and cover influenced market price negatively and significantly in
most of the years. Singh, A. (1995) undertook an empirical study of 120 companies for a
period of ten years from 1983 to 1992. Dividend per share and earnings per share had positive
and significant impact on share price. Growth and return on investment had weak influence
whereas bonus issue had a positive and significant effect on share price. Performance and
growth were the broad indicators of quality of management.
Lalwani, M. (1997) studied three years period ending March of 1995, 1996 and 1997
for a panel of 117 major stocks listed at the National Stock Exchange (NSE). Among many
influencing factors, earnings per share under both equation and for all years predominantly
determined Indian stocks followed by sales to equity ratio and payout ratio. Tuli, Nishi and
Mittal, R.K. (2001) made an attempt to determine the price earning ratio of 105 companies for
the period 1989-93 using cross sectional analysis. Variability in market price, dividend
payout ratio and earnings per share were found to be significant whereas size, debt equity
ratio and growth were insignificant.

4
 Malakar, B. and Gupta, R., (2002) tested data on determinants of share price of eight
major cement companies in India for the period 1968 to 1988. Two-Stage-Least-Squares
method was applied for estimation purpose. The system contains five equations involving five
endogenous variables, namely, the share price, dividend per share, earnings per share,
retained earnings, and sales proceeds; one lagged endogenous variable and five exogenous
variables, namely product price, rate of interest, investment expenditure, sales asset ratio and
debt equity ratio. Earnings per share and investment expenditure were found to be significant
determinant of share price. Bodhanwala, R.J. (2003) analyzed share price of top ten
companies based on market capitalization listed on Bombay Stock Exchange. It was found
out that determination of share price was a function of estimation of abnormal growth rate for
‘n’ years rather than cost of equity.
Dutta, S.K. (2004) made a survey on three groups viz; individuals, brokers and
financial institutions to study the impact of micro and macro factors on share price. Most of
the individual and brokers considered the role of random elements in share price as very
important in post reform period. Saggar, S. (2005) analyzed the financing and investment
pattern of non-financial, non-government, public limited firms over the period 1971-72 to
1999-2000, at an aggregate and disaggregate level of major industry groups. On the sources
side, the financing pattern of Indian firms was found to be debt based but their share of
internal sources increased markedly in the latter half of the 1990’s, which had an impact on
share prices.
Foreign studies:
Conroy, Robert M., et al (2000) studied the pricing effects of dividend and earnings
announcements by taking advantage of the unique setting in Japan. They found that share
price reactions were significantly affected by earnings surprises, especially management
forecasts of next years’ earnings. Grossman, Z.P., (2000) examined the share price behavior
of two companies, the Adams Express and the American Express from 1885 to1898. The
average of daily bank clearances outside New York City and direction of economic growth
influenced express share prices. Interest rates too were determinant of changes in share prices.
Dividends gave some indirect indication of earnings as well as a definite measurable return.
Irfan, C.M. and Nishat, M. (2000) identified the joint effect of multiple factors on
share prices in Karachi Stock Exchange (KSE) using annual balance sheet data of listed firms
during 1981-2000. Out of six fundamantal factors, only four had impact on share prices at
KSE i.e. payout ratio, size, leverage and yield. A comparison of pre-reform and post-reform

5
was also undertaken in the study. Dyl. E. A., (2002) examined whether the cross sectional
variations in Australian share prices were partially explained by measures of firms size and
ownership characteristics. A sample of 400 firms whose shares were traded and listed on
Australian Stock Exchange (ASE) for the year 1995 had been employed. The results revealed
that firms owned predominantly by smaller shareholders tend to have low stock price and that
large well known firms have high stock prices.
Piotroski D. Joseph. (2004) studied the extent to which trade generating activities of
three informed market participants-financial analysts, institutional investors and insiders
influenced the relative amount of market level information impounded into stock prices. They
found out that stock return synchronicity was positively associated with analysts forecasting
activities, consistent with analysts increasing the amount of industry level information in
prices through intra-industry information transfers.
The foregoing review of studies reveals that many research studies have been
conducted in this area but they have not provided sound theoretical and empirical explanation
as to why securities sell at certain prices. Most of these studies were based on small sample
with a limited number of variables and analyzed different forms of relationships without
comparing their relative performance. The present study is an improvement over earlier
studies. Firstly, it employs large sample for purpose of investigation. Secondly, it examines a
large number of variables than those included in earlier studies. Thirdly, it considers the
impact of post reform era of liberalization on share prices, which was an important period for
development of capital market in India.
Section - II
Database and Research Methodology
The present study deals with fundamental analysis of share valuation as it focuses on
factors relating to company. This section explains in detail the objectives, period, sample and
database of the study.
Objectives of the study
The present study has been undertaken to meet the following specific objectives:
1. To examine the empirical relationship between equity share prices and explanatory
variables such as: Book Value Per Share (BV), Cover (C), Dividend Per Share (DPS),
Earnings Per Share (EPS), Payout (P), Price Earning (P/E), Return Capital Employed (ROCE)
and Size (S) for the period 2001-2005.

6
 2. To study the significance of above variables in all the six industries as well as for
grouped data of all these industries.

Sample and period of study

The data employed in the study relates to manufacturing sector of companies listed on
Bombay Stock Exchange. 160 companies covering the following industries have been finally
selected for the purpose of the study
Industry No. of Companies
General Engineering 28
Cotton Textile 23
Chemical 33
Iron and Steel 26
Electrical 28
Miscellaneous 22
Total 160
While selecting the sample of the companies from six industries, the following criteria is
adopted:
I. The necessary financial data required for calculating the measures of dependent and
independent variable pertaining to all the years 2001-2005 is available.
II. The companies did not skip dividend for any two successive years are included the
sample.
III. The company whose average earnings per share of any three successive years is not
zero or negative is also considered.
IV. Further only those companies whose price data is available are retained in the sample
size.
V. The listed shares on Bombay Stock Exchange are considered.
Database
The data relating to the companies was taken from ‘PROWESS’ database of the Centre
for Monitoring Indian Economy (CMIE) and Bombay Stock Exchange Official Directory.
The supplementary sources of data were:
a) 2004 Compendium of Top 500 companies in India published by Capital Market
publishers India Pvt. Ltd.

7
b) Financial journals/Dailies like Capital Market, Business India, Fortune India, Dalal Street
and financial newspapers like Economic Times and Financial Express were also used.
c) Data regarding share prices was also taken from website: www.bseindia.com.

Regression Model
The “Linear Multiple Regression” approach has been applied primarily to minimize
the problem of multicollinearity. This technique of multivariate analysis was selected because
it is the most appropriate tool for evaluating the individual and combined effect of a set of
independent variables on dependent variable. The significance of the coefficient of various
explanatory variables was tested at 1% and 5% by computing t-values. To determine the
proportion of explained variation in the dependent variable, coefficient of multiple
Determination (R2) was worked out. The overall significance of regression equation was
tested with the help F-values.
Section III
Company Performance Variables and Equity Share Prices
For the purpose of empirical analysis, share price has been assumed to be dependent
variable while other factors have been taken as explanatory or independent variables. To
explain share price in the year ‘t’, data used to calculate the values of explanatory variables
relate to the years (t-1) i.e. preceding the year ‘t’ (t refers to the year, the share price of which
is being explained). This is based on the assumption that the dividend decisions made by a
company in a given year as well as other variables are apt to affect the market price of its
share in the following year when the data is publicly made available.
1. Share Price (SP)
The forces of demand and supply in the market mainly determine the market price of
the share. It is the balance struck between the buyers and sellers. (Malhotra, 1987, p.74).
Some of the empirical studies (Piotroski D. Joseph. et al 2004); (Zahir and Khanna, 1982)
have also provided evidence in favour of this average proposition. Mathematically it is
calculated as:
SPt = (PH + PL) / 2
Where PH is the highest market price, PL is the lowest market price during the year, which
relates to the ‘t’ period.
8
 2. Book Value (BV)
It is also known as net asset value per share because it measures the amount of assets,
which the corporation has on behalf of each equity share. BV shows the investment per share
made in the business by the shareholders. A high Book value usually indicates that the
company has a good record of past performances, i.e. high reserves therefore high market
price (Grewal, 1986, p111). Various studies have considered this ratio as a determinant of
share price (Zahir and Khanna 1982; Dixit 1983; Bal Krishan 1984). It is calculated as
follows:

Book Value per share = Equity Share Capital + Shareholders Reserves

Total no. of Equity Shares Outstanding

3. Cover (C)
It shows the extent to which the dividend per share is protected by the earnings of the
company. Cover has a negative relationship with market price. It is calculated as follows: -

Cover = Profits after tax and preference dividend / Equity Dividend

or
Cover = Earnings per share / Dividend per share
4. Dividend Per Share (DPS)
It refers to the actual amount of dividend (gross) declared per share. The net profit
after taxes belong to shareholders but the income that they really receive is the amount of
earnings distributed and paid as cash dividend. The dividends generally influence the share
price in positive direction as depicted by earlier studies (Gordon 1959, Desai 1965, Irfan, C.M.
and Nishat, M. 2000) (Gitman, Lawrence J., 2004).

Dividend Per Share = Total amount (dividend) paid to equity shareholders

Number of Equity Shares Outstanding

5. Earnings Per Share (EPS)

The Equity shareholders are the sole claimants to the net earnings of the corporation
after making payment of dividend to the preference shareholders. The significance of this
ratio flows from the fact that higher the earnings per share, the more is the scope for a higher
rate of dividend and also of retained earnings, to build up the inner strength of the company.
Therefore, a higher EPS would increase the market price and vice versa. Several event-based

9
studies established direct relation between share price changes with earnings or dividend
changes (Ball and Brown 1968; Baskin 1989). It is calculated as follows; -

EPS = Net Income after interest, income tax & preference dividend
Numbers of Equity Shares Outstanding

6. Dividend Payout Ratio (P)

Dividend Payout shows the percentage share of the net profits after taxes and
preference dividend paid out as dividend to equity shareholders. It can be calculated by
dividing the total dividend paid to the equity shareholders by the total profits/earnings
available for them. Alternatively, it can be found out by dividing DPS by EPS. Linter (1956)
linked dividend changes to earnings while Shapiro valuation model (1962) showed dividend
streams discounted by the difference in discount rate and growth in dividend should be equal
to share price. This predicts direct relation between payout ratio and the price-earning
multiple. Conversely it means that there is an inverse relation between payout ratio and share
price changes.

Dividend Payout = Total Dividend to Equity shareholders *100

Total Net Profit belonging to Equity shareholders

or
= Dividend per share / Earnings per share
7. Price/Earning Ratio (P/E)
P/E ratio expresses the relationship between the market price of a company’s share and
its earnings per share. It indicates the extent to which the earnings of each share are covered
by its price. The ratio helps an investor to make an approximate calculation of the time
required to recover his investment in a company’s share. The price-earning ratio has a
positive relationship with market price(Dixit, 1986). It was calculated as follows: -
P/E = Market price per share / Earnings per share
8. Return on Capital Employed (ROCE)
The return on investment indicates the efficiency with which a company utilizes funds
invested in it. This ratio reveals how well the resources of a firm are being used, higher the
ratio better are the results. The inter-firm comparison of this ratio determines whether the
investments are attractive or not as the investor would like to invest only where the return is
10
higher. It generally has positive relationship with market price of equity share. It is computed
as follows: -

ROCE = Profits after tax, plus interest * 100

Total Capital Employed

11
 9. Size (S)
The size of the firm if captured through total capital employed, is expected to influence
the share prices positively as large firms are better diversified than small ones and thus are
less risky (Benishy, 1961). Atiase (1985) showed that as the size of the firm increases, their
share price volatility declines.The large size firms are expected to have higher market values
of their shares. For studying the influence of size on equity share price, size may be measured
in terms of total assets, turnover, paid up capital, net worth, sales, number of shares
outstanding, etc. The amount of total assets is taken as a measure of size because it represents
the total resources at the command of the firm (Sachdeva, V.P. 1994).
Section IV
Analysis and Interpretation of Regression Results
It is clear from table1 that in aggregate, industries earnings per share and PE ratio are
the most important determinants of market price as their respective co-efficients are
positively significant at 1% level in all the years. The co-efficient of book value per share is
positively significant at 1% level in all the years except 2004. Dividend per share though
significant at 1% level in the year 2003, 2004 and 2005 but gave negative results in the most
of the years. Cover is found to be negatively significant at 5% level in the year 2004 and
2005. The coefficient of determination (R2) is also found increasing in each regression with
its respective ‘F’ value significant at 1% level. Table 2 shows that R2 explained 81.5%
variation in market price of shares in the year 2005 which was 60.5% in the year 2001. All
this leads us to conclude that Earnings Per Share is the most important determinant of share
price followed by Book Value and Price Earning Ratio. Size is found to be insignificant in the
study.
As far as Industry wise analysis is concerned, General Engineering Industry’s EPS is
positively significant at 1% level in all the years except for 2005. Cover is found to be
negatively significant in at 5% level in the year 2001. DPS is found to be positively
significant in the year 2005 at 1% level which is due to increase in dividend payment by
firms. Book value is found to be significant at 1% level in the year 2003 and 2005. PE ratio is
too found to be positively significant in most of the years. The coefficient of determination
(R2) indicate that variables could explain 75% variation in market price in the year 2005
which was 46.6% in 2001. The computed F-values are found to be significant at 1% in all the
years. Therefore Earning Per Share is the most important factor followed by Book Value and
PE ratio that affects share prices in Engineering industry.
12
 In Cotton Textile Industry, Book Value is found to be positively significant at 1%
level in the year 2001 and 2003 followed by size, which is also positively significant all the
years. Therefore only size and Book Value proved to be important determinant of share price
in Cotton Textile Industry. Rest of the explanatory variables is statistically insignificant in
most of the years. The coefficient of determination (R2) was 95.6% in 2005, which was 83.1%
in 2001 as revealed by table 2. The F-value is found to be significant in all the years at 1%
level. The results proved that excessively high Book Value often raises the expectations for
bonus issues and significantly affects the market price of shares. Size indicates that bigger the
size of a firm higher is the market price of its share and vice-versa as shown in Cotton Textile
industry,
In chemical industry, coefficient of Book Value has shown expected positive signs
and is found to be significant at 5% level in the year 2002. PE ratio is found to be positively
significant in all the years. Return on Capital Employed is positively significant at 5% level in
the year 2002 and 2003. Cover, DPS, Size and EPS are found to be statistically insignificant
in all the years. Table 2 shows that the coefficient of determination (R2) varied from 40.9% to
85.5% during the period under study and all of them are significant at 1% level with their
respective F-values. The results show that investors in Chemical industry, value shares on the
basis of PE ratio followed by Return on Capital Employed, as both are indicators of
profitability of the company.
In Iron and Steel Industry, coefficient of Book value is positive in all the years and
highly significant at 1% level in the year 2001 and 2004. This shows that the available assets
are a good measure of the earning power of the industry. PE ratio is positively and highly
significant in all the years except 2001. Dividend per share is positively significant in the year
2003 and 2005 but negative in rest of the years, which is contrary to supposition. Size too is
positively significant at 5% level in the year 2004. Cover and Payout are found to be
statistically insignificant in all the years. The coefficient of determination (R2) as depicted in
table 2 varied from 66.4% in the year 2001 to 72.2% in the year 2005. F-values are significant
at 1% level throughout the period of study. The External Economic and market factors appear
to have more pronounced impact on share prices than the fundamental factors.
In Electrical Industry, t-values of EPS have positive sign and are found to be highly
significant at 1% level in the year 2001 and 2002. PE ratio is positively significant at 1%
level in all the years except 2001. Payout ratio showed negative and significant relationship
with market price at 1% level in the year 2003, 2004 and 2005. Rest of the explanatory

13
variables is found to be insignificant for the purpose of analysis. The coefficient of
determination (R2) as shown in table 2 varied from 74.6% in 2001 to 76.2% in 2005. F-value
is positively significant at 1% level in all the years except 2004. Therefore EPS and PE ratio
turned to be most important determinant of share price in this industry, which means that
higher EPS higher is the market price and vice-versa. DPS also showed significant
relationship with market price, which implies that increase in dividends, indicated improved
earning prospects of the company.
In miscellaneous Industry, coefficient of Book Value is positive in all the years except
2004. The t-values are highly significant at 1% level in the year 2001 and 2002. Cover is
negatively significant in the year 2001 and 2005. DPS is found to be positively significant in
2003 and 2004. EPS showed negative sign, which is contrary to the expectations. Price
Earnings ratio too is highly significant at 1% level in the year 2004 and 2005. Return on
Capital Employed is statistically significant in 2001 only. Size is found to be insignificant.
Table 2 shows that the coefficient of determination (R2) varied from 95.4% in the year 2001
to 92.3% in the year 2005. The f-values are found to be statistically significant at 1% level in
all the years. Therefore, Book value per share, price-earning ratio and payout are important
determinants of share price in miscellaneous industry.

Section V
Conclusion
The present study attempts to examine the empirical relationship of explanatory variables
namely, dividend per share, earnings per share, price-earnings ratio, book value per share, size,
cover, return on capital employed and payout ratio on market price of the shares in the post-
reform era of liberalization. The relationship between independent and dependent variables of
160 companies is studied over a period of five years ranging from 2001 to 2005.The results
revealed that Earnings per share and book value per share are important determinant of share
price as they are an index of the sound financial position of the companies. Dividend per share
is important determinant of share price, which shows that the companies should adopt a liberal
dividend policy to activate the primary as well as secondary market. A high dividend rate may
also help in increasing the market price and result in high capital appreciation to the
shareholders as depicted by payout ratio and cover. Price-earnings ratio too showed investors’
expectation about the growth in the firm’s earnings that varied from industry to industry.

14
 References
 Ariff, M., and Khan, W., (2000), “Key Fundamental Factors and Long Run Stock Price
Changes”, Working Paper APFA Meeting, April 2000.

 Ariff, M., Shamsher, M., and Annuar, M. N., (1994), “Finding the Factors Associated
with Stock Price Volatility: A Comparative Study of Developed and Developing
Share Markets” in D.Ghosh and Khaksari (eds.) Managerial Finance in The
Corporate Economy, Routlege, London, U.K.

 Atiase, R.K., (1985), “Pre-disclosure Information, Firm Capitalization and Security Price
Behavior around Earnings Announcement”, Journal of Accounting Research, Vol.
23, No. 2, pp 215-235.

 Balkrishan, (1984), “Determinants of Equity Prices in India”, Management Accountant,

December 1984, pp 728-730.

 Ball, R., and Brown, P., (1968), “An Empirical Evaluation of Accounting Income
Numbers”, Journal of Accounting Research, Vol. 6, No. 2, pp 157-178.

 Baskin, J., (1989), “Dividend Policy and Volatility of Common Stock”, Journal of
Portfolio Management, Vol. 15, No.3, pp 19-25.

 Benishay, Haskal. (1961), “Variability in Earning-Price Ratios of Corporate Equities”,

American Economic Review, Vol.51, (march 1961), pp: 81-94.

 Bodhanwala, R.J. (2003), “How market Value Shares- The Indian Scenario”, Abhigyan,
Vol. 21, No.3, Oct-Dec 2003, pp: 27-33.

 Chandra, Parsanna,(1981), “Valuation of Equity Shares in India”, Sultan Chand and Sons,
New Delhi, 1981.

 Compendium of Top 500 Companies in India (2004) by Capital Market Publishers India
Pvt.Ltd.

 Conroy, Robert M., et al (2000), “A test of the Relative Pricing Effects of Dividends and
Earnings; Evidence from Simultaneous Announcements in Japan”, The Journal of
Finance, Vol.55, June 2000.

 Desai, Meghand, (1965), “Stock Prices, Earnings and Dividends in India- A Quantitative
Analysis”, Indian Economic Journal, Vol.12, pp 432-436.

15
 Dixit, R.K. (1986), “Behaviour of Equity Share Prices and Investment in India”, Deep and
Deep publications, New Delhi, 1986.

 Dixit, R.K., (1983), “Behavior of Share Prices in India”, Ph.D. Thesis, Punjab University,
Chandigarh.

 Downs, T.W., (1991), “An Alternative Approach to Fundamental Analysis: The Asset Side
of the Equation”, Journal of Portfolio Management, Vol. 17, No. 2, pp 6-17.

 Dutta, S.K., (2004), “The Share Price and its Valuation”, The Management Accountant,
April 2004, Vol 39, No.4. pp:274-282

 Dyl. E. A., et al (2002), “Do Share Prices Matter?” Journal of Accounting and Finance,
Vol.42. pp 225-237.

 Gitman, Lawrence J. (2004), “Principles of Managerial Finance”, Pearson Education,

pp:560-590.

 Gordon, M. J. (1959), “Dividends, Earnings and Stock Prices”, Review of Economics and
Statistics, Vol.XLI (May 1959), pp: 99-105.

 Gordon-Shapiro model is often referred to as Gordon, M.J., (1962), “The Investment

Financing and Valuation of the Corporation”, Homewood, Illinois: Irwin.

 Grewal, S. S. (1986), “Making Money on the Stock Market”, Vision Books, New Delhi,
1986.

 Grossman, Z.P., (2000), “Determinants of Share Price Movements in Emerging Equity

Markets: Some Evidence from America’s Past”, The Quarterly Review of
Economics and Finance, Vol.40, pp 355-374.

 Kakani, R.K., Saha, B., and Reddy, V.N., (2001), “Determinants of Financial
Performance of Indian Corporate Sector in the Post-Liberalization Era: An
Exploratory Study”, NSE Research Initiative; National Stock Exchange; Mumbai,
Working Paper 005,April 2001.
 Khan, M.Y. and Jain, P. K. (1994), “Financial Management Text and Problems”, Tata
McGraw-Hill Publishing Company Limited, New Delhi.

 Khanna, S., (1999), “Financial Reforms and Industrial Sector in India”, Economic and
Political Weekly, Nov 6, 1999, pp 3231-3241.

16
 Lalwani, Mahesh.,(1997), “Determinants of Stock Prices on India’s National Stock
Exchange”, UTI Institute of Capital Markets and Quest Publications, 1997 pp.135-
149.

 Linter, J., (1956), “Distributions of Incomes of Corporations among Dividends, Retained

Earnings and Taxes”, American Economic Review, Vol. 46, No.1, pp 97-113.

 Malakar, B. and Gupta, R., (2002), “Determinants of Share Price- A System Approach:
The Modified Model”, Finance India, Vol.16, No.4, December 2002 pp.1409-1418.

 Malhotra, V.J., (1987) “Determinants of Equity Prices in India”, Ph.D. Thesis, Himachal
University, Shimla.

 Ojha, P.Raj, (1973), “Corporate Dividend Policy in Indian Cotton Textile Industry”, Ph.D.
Thesis, University of Rajasthan.

 Pal, Parthapratim, (2001), “Stock Market Development and its Impact on The Financing
Pattern of the Indian Corporate Sector”, NSE Research Initiative; National Stock
Exchange; Mumbai, Working Paper 004,April 2001.

 Piotroski D. Joseph. et al (2004), “The Influence of Analysts, Institutional Investors, and

Insiders on the Incorporation of Market, Industry, and Firm-Specific Information
into Stock Prices”, The Accounting Review, Vol. 79, No.4, pp.1119-1151.

 Rappoport, (1986), “The Affordable Dividend Approach to Equity Valuation”, Journal of

Financial Analysis, Vol. 42, No. 4, pp 52-58.

 Sachdeva, Y.P., (1994), “Rise and fall of Share Prices: Factors and Determinants”, Deep
and Deep Publications, New Delhi.

 Saggar, S. (2005), “Financing and Investment Pattern of Indian Firms”, Economic and
Political Weekly, 15th January 2005.

 Singh, A. (1995), “Equity Price Behaviour in Indian Corporate Sector”, Ph.D., Thesis,
Guru Nanak Dev University, Amritsar.

 Srivastava, S.C., (1966), “Stock Prices, Dividends and Earnings in India”, Paper
Presented before the VI Annual Conference of the Indian Econometric Society, held
in December 1966, at Calcutta.

17
 Tuli Nishi and Mittal, R.K., (2001), “Determinants of Price-Earnings Ratio”, Finance
India, Vol.15, No.4, December 2001, pp 1235-1250.

 Vanhorne, James C.,(1978) “Financial Management and Policy”, Prentice Hall, New
Delhi, 1978.

 Willcox, J.W., (1984), “The P/B-ROE Valuation Model”, Journal of Financial Analysis,
Jan-Feb, pp 58-66.

 Zahir M.A.and Khanna,Y.,(1982),”Determinants of Stock Prices in India”, The Chartered

Accountant, Vol.30, No. 8, pp 521-523.

18
 APPENDIX-I
TABLE-1
Determinants of Equity share prices in various Industries-Regression Results

Variable / Industry BV C DPS EPS P PE ROCE S

year

G N Y** N Y* N Y* N N
2001 Ct Y* N N N N N N Y*
C N N N N N Y* N N
IS Y* N N N N N N N
E N Y** N Y* N N N N
M Y* Y** N Y* Y** Y** Y* N
A Y* N N Y* N Y* Y** N
G Y** N N Y* N Y* N N
2002 Ct N Y** N N Y** Y** N Y*
C Y** N N N N Y* Y** N
IS N N N Y* N Y** N N
E N N Y* Y* N Y* N N
M Y* N N N N N N N
A Y* N N Y* N Y* Y** N
G Y* N N Y* Y** N N N
2003 Ct Y* N N N N N N Y*
C N N N N N Y* Y** N
IS N N Y** N N Y* N N
E N N Y* N Y* Y* N N
M Y** Y** Y** N Y** Y** N N
A Y* N Y* Y* N Y* N N
G N N N Y* N Y* N N
2004 Ct N N N N N N N Y*
C N N N N Y** Y* N N
IS Y* N N N N Y* Y** Y**
E N N N N Y* Y* N N
M Y* N Y* Y* Y* Y* N N
A N Y** Y* Y* N Y* N N
G Y* N Y* Y* N N Y* Y*
2005 Ct N N N Y* N N N Y**
C N N N N N Y** N N
IS N N Y** N N Y* N N
E N N N N Y* Y* N N
M Y** Y** N Y* Y* Y* N N
A Y* Y** Y* Y* Y* Y* Y* N
Y* and Y** denote the significance at 1% and 5% level for t-values of regression coefficients respectively.
N denotes insignificant values.
Where- G = General Engineering Industry; Ct = Cotton Textile industry; C = Chemical Industry;
IS = Iron and Steel Industry; E = Electrical Industry; M = Miscellaneous Industry;
A = Aggregate Industry

19
 TABLE-2
Coefficient of Determination of Various Industries-Regression Results

Year/
Values 2001 2002 2003 2004 2005
Industry

General
Engineering Adj R2 0.466 0.749 0.877 0.84 0.75
Industry

F-Value 3.944* 11.063* 25.147* 21.247* 12.542*

Cotton
Textile Adj R2 0.831 0.868 0.837 0.883 0.956
Industry
F-Value 14.512* 19.09* 15.29* 21.69* 60.85*
Chemical Adj R 2
0.855 0.749 0.65 0.678 0.409
Industry
F-Value 24.56* 12.96* 8.42* 9.41* 3.77*
Iron and
Steel Adj R2 0.664 0.88 0.756 0.646 0.722
Industry
F-Value 7.18* 24.1* 10.7* 6.6* 9.1*
Electrical Adj R2 0.746 0.91 0.685 0.369 0.762
Industry
F-Value 10.9* 34.9* 8.35* 2.9** 11.8*

Miscellaneou Adj R2 0.954 0.938 0.948 0.913 0.923

s Industry

F-Value 55.45* 40.65* 48.50* 28.65* 30.45*

Aggregate Adj R2 0.605 0.698 0.737 0.76 0.815
Industry
F-Value 31.4* 46.94* 56.75* 35.4* 87.03*

* and ** denote significance at 1% and 5% level for F-values respectively.

20
 APPENDIX-II
LIST OF COMPANIES UNDER STUDY

General Engineering Industry 12. Vardhman Spinning & General

1. Ashok Leyland Ltd. Mills Ltd.
2. Bajaj Auto Ltd. 13. Eurotex Industries & Exports Ltd.
3. Bharat Earth Movers Ltd. 14. GTN Textiles Ltd.
4. Cummins India Ltd. 15. Maral Overseas Ltd.
5. Eicher Motors Ltd. 16. Nahar Exports Ltd.
6. Engineers India Ltd. 17. Patspin India Ltd.
7. Hero Honda Motors Ltd. 18. Prime Textiles Ltd.
8. Kirloskar Brothers Ltd. 19. Super Spinning Mills Ltd.
9. Kirloskar Oil Engines Ltd. 20. Vardhman Polytex Ltd.
10. Lakshmi Machine Works Ltd. 21. Century Textiles & Ind. Ltd.
11. Larsen & Toubro Ltd. 22. Shri. Dinesh Mills Ltd.
12. Mahindra & Mahindra Ltd. 23. Sutluj Industries Ltd.
13. Motor Industries Co. Ltd. Chemical Industry
14. Patel Engineering Ltd. 1. Atul Ltd.
15. Punjab Tractors Ltd. 2. Berger Paints India Ltd.
16. Thermax Ltd. 3. Castrol India Ltd.
17. Voltas Ltd. 4. Chambal Fertilizers & Chemicals
18. CMC ltd. Ltd.
19. Infosys Technologies Ltd. 5. Finolex Industries Ltd.
20. Moser Baer India Ltd. 6. Godrej Industries Ltd.
21. Polaris Software Lab. Ltd. 7. Goodlass Nerolac Paints Ltd.
22. Satyam Computer Services Ltd. 8. Gujrat Narmada Valley Fertilizers
23. Tata Infotech Ltd. Co.Ltd.
24. Wipro Lt. 9. ICI India Ltd.
25. Alfa Laval (India) Ltd. 10. Indian Petrochemicals Corp. Ltd.
26. Gabriel India Ltd. 11. Jubilant Organosys Ltd.
27. KSB Pumps Ltd. 12. Micro Inks Ltd.
28. Tayo Rolls Ltd. 13. National Fertilizers Ltd.
Cotton Textile industry 14. Nirma Ltd.
1. Alok Industries. 15. Pidilite Industries Ltd.
2. Bombay Dyeing & Mfg. Co.Ltd. 16. Supreme Industries Ltd.
3. Century Enka Ltd. 17. Tata Chemicals Ltd.
4. Century Textiles & Inds. Ltd. 18. Asian Paints (India) LTD.
5. DCM Shriram Conslidated Ltd. 19. Bharat Petroleum Corpn. Ltd.
6. Forbes Gokak Ltd. 20. Hindusthan Petroleum Corpn. Ltd.
7. Grasim Industries Ltd. 21. Oil & Natural Gas Corpn. Ltd.
8. Mahavir Spinning Mills Ltd. 22. Reliance Industries Ltd.
9. Rajasthan Spinning & Wvg. Mills 23. Indian Oil Corpn. Ltd.
Ltd. 24. Aurobindo Pharma Ltd.
10. Raymond Ltd. 25. Aventis Pharma Ltd.
11. SRF Ltd. 26. Cipla Ltd.
27. Dr. Reddy’s Laboratories Ltd.

21
28. Ipca Laboratories Ltd. 12. Titan Industries Ltd.
29. Lupin Ltd. 13. Torrent Power AEC Ltd.
30. Nicholas Piramal India Ltd. 14. Torrent Power SEC Ltd.
31. Orchid Chemicals & Pharmaceuti 15. Amara Raja Batteries Ltd.
cals Ltd. 16. Bayer Diagnostics India Ltd.
32. Ranbaxy Laboratories Ltd. 17. Bhagyanagar Metals Ltd.
33. Sun Pharmaceuticals Inds. Ltd. 18. Finolex Cables Ltd.
Iron and Steel Industry 19. Graphite India Ltd.
1. Balmer Lawrie & Co. Ltd. 20. HCL Infosystem Ltd.
2. Bharat Forge Ltd. 21. HEG Ltd.
3. Bhushan Steel & Strips Ltd. 22. Havell’s India Ltd.
4. Electrosteel Castings Ltd. 23. Honda Siel Power Products Ltd.
5. Hindalco Industries Ltd. 24. Honeywell Automation India Ltd.
6. Jindal Saw Ltd. 25. Igarashi Motors India Ltd.
7. National Aluminium Co. Ltd. 26. Precision Wires India Ltd.
8. PSL Ltd. 27. Salora International Ltd.
9. Sesa Goa Ltd. 28. Wartsila India Ltd.
10. Sterlite Industries (India) Ltd. Miscellaneous Industry
11. Sundram - Clayton Ltd. 1. Apollo Tyres Ltd.
12. Sundram – Fasteners Ltd. 2. Asian Star Co. Ltd.
13. Tata Iron & Steel Co. Ltd. 3. Classic Diamonds (India) Ltd.
14. Tube Investment of India Ltd. 4. Colgate-Palmolive (India) Ltd.
15. Usha Martin Ltd. 5. Dabur India Ltd.
16. Acrow India Ltd. 6. Godfrey Philips India Ltd.
17. Investment & Precision Casting 7. Hindustan Lever Ltd.
Ltd. 8. ITC Ltd.
18. Kalpatarn Power Transmission Ltd. 9. Kesoram Industries Ltd.
19. LG Balakrishnan & Bros Ltd. 10. MRF Ltd.
20. MM Forgings Ltd. 11. Associated Cement Companies
21. Maharashtra Seamless Ltd. Ltd.
22. Oriental Containers Ltd. 12. Gujrat Ambuja Cement Ltd.
23. Shivalik Bimetal Controls Ltd. 13. Madras Cements Ltd.
24. Sterlings Tools Ltd. 14. Ballarpur Industries Ltd.
25. Tata Sponge Iron Ltd. 15. Balrampur Chini Mills Ltd.
26. Tayo Rolls Ltd. 16. Britannia Industries Ltd.
Electrical Industry 17. Glaxosmithkline Consumer
1. ABB Ltd. Healthcare Ltd.
2. Bharat Electronics. 18. Gujrat Ambuja Exports Ltd.
3. BHEL 19. Marico Industries Ltd.
4. Blue Star Ltd. 20. Nestle India Ltd.
5. Exide Industries Ltd. 21. Ruchi Soya Industries Ltd.
6. Mirc Electronics Ltd. 22. Tata Tea Ltd.
7. Reliance Energy Ltd.
8. Samtel Color Ltd.
9. Siemens Ltd.
10. Surya Roshni Ltd.
11. Tata Power Co. Ltd.

22