CHAPTER 2

REVIEW OF LITERATURE

Introduction

Investment in equity stocks is one of the major avenues of investment to appreciate the
capital and to earn regular dividend. Investors usually considers stock price while
making their decision of investing in stock market. Stock price changes frequently due
to buying and selling of securities on continuation basis, so it is difficult to predict
future stock price for the investors. Fundamental variables are helpful in determining
intrinsic value of the stock which is helpful to find out overpriced and under priced
stocks. Investors can take their rational decision by comparing market value of the
stock with its intrinsic value. The importance of fundamental analysis as a stock
valuation technique was firstly introduced by Graham and Dodd in the book ‘Security
Analysis’ in 1934 (Graham and Dodd, 1934). Investor should consider all these
fundamental variables while investing in equity stocks. Fundamental determinants are
also useful for management in formulating of company policies, for government for
legislative requirement and for individual as well as for institutional investors for
making their investment decisions. Fundamental analysis also warns the investors
regarding slowdown in company financial conditions in future (Ohlson, 1980). So it is
very essential to have knowledge of these significant fundamental variables of share
prices. Collins (1957) has done revolutionary work on fundamental variables of stock
prices for US banks and found dividend, net profit, operating earnings and book value
as the fundamental variables that affects share prices. Following Collins (1957), there
have been various attempts to identify the variables affecting share prices for various
markets across the globe at different points of time.

Review of Literature

Literature review is one of the most important parts of research because it helps in
creating a framework and structure for the research. By studying the literature, a
researcher can set research objectives, hypothesis and a set of variables. The present
chapter has reviewed various past studies based on fundamental determinants and the

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 investor’s perception regarding these fundamental variables. The empirical findings and
terminology associated with the share price determinants are also be studied.

The basis of divisions for literature review for present study are time period, variables
used, sectors covered, methodology used, markets where studies have been carried out,
and the findings made by the researchers. The prime source of the studies reviewed
here includes various websites, selected referred national and international journals
namely Journal of Finance, Journal of Accounting Research, Finance India, Financial
Analysts Journal, Journal of Financial Economics etc. and databases like JSTOR,
Emerald etc. The review is based on the literature collected on the concept of stock
price determinants in different countries. A total of 95 publications for a sample period
of year 1983 to 2014 including proceedings of the conferences are reviewed. Table 2.1
presents the literature review in a systematic manner prepared according to the markets
studied, time-period, variables used and terminology used.

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 Table 2.1: Classification of Available Literature
Author Market Year Statistical tool Sectors Variables Researchers Contribution
Bhole India 1980 Regression Analysis - Earnings, Dividend Stock price movement is not so much affected by
earnings, dividend and between these two
variables earnings affect stock price better than
dividends.

Basu NYSE 1983 Multivariate Regression - Earning yields, Firm size There is positive significant relationship found
Model between earning yield and risk adjusted stock
returns. The size of the firm indirectly affects the
relationship between these two.

Bhandari NYSE 1988 Regression Model - Debt to equity, Beta, Firm size Stock returns are positively related to debt to
equity when firm size and beta be used as a
controling variables.

Ou and Penman NYSE 1989 LOGIT Model - 68 Accounting variables Accounting fundamental variables have
capability to capture stock values that are not
reflected in the market price of equity stocks.

Jaffe et al. NYSE 1989 Seemingly Unrelated - Earning yields, Market value Earning yield is found to be significant
Regression determinant in both January as well as in other
eleven months whereas size has negatively
significant impact in the month of January only.

Chan et al. Japan 1991 Seemingly Unrelated Manufacturing, EY, Size, B/M, Cash flow yield All the four variables taken under study have
Regression Model Non- significant assosciation with the stock returns.
manufacturing The book-to-market ratio and cash flow yield
found to be the most significant fundamental
variables.

Fama and NYSE, 1992 Regression model - B/M , MVE, E/P, Financial B/M has the strongest impact on expected stock
French AMEX,NASDAQ leverage, Beta returns.

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 Lev and - 1993 Cross sectional regression - Inventory, AR, Capital
Thiagrajan model expenditure, R&D, GM, S & A
expenses, Provision for doubtful
receivables, Effective tax, Order
backlog, Labor force, LIFO
Earnings, Audit qualification
Fundamental variables are very helpful in
earning excess stock return and investors should
consder all these variables to earn extra earnings
persistence and growth.

Ferson and 21 countries 1994 Regression Analysis - Relative valuation, Relative Price to book ratios, gross domestic product,
Harvey economic performance, Industry interest rate level and dividend price ratios
Structure affects the stock returns.
Agarwal et al. Singapore Stock 1996 Multiple regression and - PB, BVE, Dividend, Growth Price to book found to be signficant valuation
Exchange Pooled regression rate of dividend, DTA, model and fundamental variables that affects the
Inflation. value of firm also affects the price to book. D/B
found to be signfcant determinant among all the
variables taken under study.
Barbee et al. New York and 1996 Correlation, Regression - MVE, Book to market value, Sales-price ratio and debt to equity has more
America model DEQ and S/P power of explaning stock returns as compared to
book to market value and market value of equity.
Mukherji et al. Korean Stock 1997 Median Spearman Rank - Beta, B/M, D/E, E/P, MVE, S/P B/M, S/P, and D/E are postive signficant
Exchange Correlation fundamental determnants and firm size has the
negative impact on stock returns but E/P or beta
is found to be insignificant determinant. Higher
leverage and less size affect both value and
growth stocks in positive way.
Oyama Zimbabwe 1997 DD model, ECM, Multi- - Macroeconomic variables Stock market index, monetary aggregate,
factor return generating inflation rate, interest rate, exchange rate,
model commodity price index and U.S market index are
the variables which were extracted and the
relationship between stock returns, money
growth, and treasury bill rate found to be quite
stable, despite of large fluctuations of prices.

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 Dhatt et al. Korea Stock 1999 Correlation and - B/M, DEQ, S/P, MVE and B/M, S/P, and DEQ are significant determinants
Exchange Regression Analysis Market risk premiums for the stocks listed in section 1 and MVE has the
negative significant impact on the stock returns
of the companies listed in section 2 and B/M has
the highest predictive power for stock returns.
Tsoukalas and UK 1999 Unrestricted VAR Model - Dividend yields, Dividend Dividend is found to be the significant
Sil growth rate, Term structure of determinant of stock returns and in contrast of it
interest rates the real dividend growth rate has not ability to
predict stock returns.
Lee - 1999 Regression Model - Earnings, Cost of capital Accounting variables helps in earning extra long
term returns.
Dechow et al. NYSE and AMEX 2000 Chi- square test and - Cash flow to price, Earnings to Short-sellers act ‘as if’ they utilized these
Regression model price, B/M, Value to market fundamental variables to find out overpriced
stock, and short-sellers also changed their trading
strategies to minimize costs and maximize their
returns.
Mohamed Malaysia 2000 Regression Model - 68 financial ratios After using the financial information, model
generates negative return for one year ahead.
This might be due to economic recession.
Piotroski - 2000 F_ Score, Cross sectional - ROA, CFO, Change in ROA, Firms with stronger fundamentals are more
regression Change in leverage, Change in useful in earnings profits and helps in seperating
liquidity, External financing, winners from loosers.
Change in GM, Change in AT
Ghicas et al. Athens 2000 Correlation and - BVE, Earnings, Incomplete Earnings and incomplete contracts are significant
Regression Model contracts variables of earnings forecasts made by
investment bankers.
Kothari   2001 Multiple regression - Fundamental variables Abnormal returns can be earned over several
years by using fundamental analysis trading
strategies.

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 Nissim and New York 2001 Residual Valuation - Sales profit margin, AT, There is significantly positive relation found
Penman et al. Model Leverage, Net borrowing cost, between market prices as well as price to earning
Operating liability leverage, ratios and book values.
Minority interest sharing
Beneish et al. - 2001 Regression model - PB, Price momentum, Post- Combination of market-related and accounting-
earnings-announcement drift, based variables have significant impact on
Total accruals, R&D, Profit extreme price performers 4 to 6 months in
margins, Capital expenditures advance of the price move and they are more
useful in separating extreme winners from
extreme losers.
Irfan et al. Karachi Stock 2002 Least Square Regression - DY, Payout ratio, Size, Payout ratio, size, leverage and dividend yields
Exchange analysis Leverage, Earning volatility, found to be signficant determiants of stock
Asset growth prices. In pre-reform period (1981 to 1990) three
factors pay out, size and dividend yield explained
more than two- fifth of the variation whereas
during post reform period 1991 to 2000) these
factors explained about only one-third of the
variability in stock prices.
Maditinos et al Athens 2004 Factor analysis and - EPS, ROI, ROE, P/E, Value, Fundamental analysis is mostly used by mutual
stock ANOVA EVA, SVA, MVA, Capital fund management companies, official members
Exchange budgeting techniques, Technical of ASE, portfolio investment companies and
analysis, Financial press, public companies and brokers believes on
rumors, Foreign markets, Govt. technical analysis and individual investors mostly
policy rely on the information from media, rumors and
their personal experiences.
AI- Deehani Kuwait stock market 2005 Traditional and relaxed - EPS, BVPS, Previous EPS, Relaxed earning bound analysis is not trusting for
extreme bound analysis Cash DPS, Previous cash DPS, effective results, so traditional EBA has been
ROE, Growth rate, DTA, used for analyzing the data. The result of
Retention ratio, PB, PE, CFPS, traditional EBA showed that previous earnings
Previous CFPS. per share, the previous cash dividend per share
and the price to book value ratio are the
significant determinants of stock prices.

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 Dimitrova USA and UK 2005 Ordinary Least Square - Exchange rate There is positive affect found on the stock market
when the value of exchange rate increases and
vice-versa.
Al–Tamimi UAE 2005 Frequency, percentage, - Firm image coincidence, Expected corporate earnings, get rich quick,
mean and standard Accounting information, stock marketability, past performance of firm’s
deviation. Neutral information, Advocate stock, government holdings, and the creation of
recommendation, Personal organized financial market are found to be most
financial needs influencing factors of investor’s behavior.
Essop South Africa 2006 Descriptive, Regression - Fundamental variables, The majority of portfolio managers were
model Technical variables depended on fundamental analysis, but also
made use of technical analysis.
Witkowska Poland 2006 Panel data model - GM, S & A expenses, ROA, The future stock returns are significantly related
Inventory, AR, Labor force, to gross margin, sales & administrative expenses
CFO, Leverage, Liquidity and return on assets and stock returns are also
strongly associated with price-earnings.
Wu and Xu China 2006 Rough set theory and - EPS , NAPS, ROA, Business Fundamental analysis could be powerful to
Neural networks Profit, Rate of return on sale, predict stock price, especially by using the neural
approach Net assets income, CR, QR, networks approach and rough set theory.
DTA, Major business growth,
Net assets growth, Net CFO,
AR turnover, IT, TAT
Aga and Istanbul Stock 2006 Regression, EGARCH - Current PE, Industrial price In every stock, price-earning appears to be a
Kocaman Exchange Model index, Consumer price index significant explanatory variable for the stock
returns but the coefficients both for IPI and CPI
are not significant.
Al-Twaijry UK stock market 2006 Stock Return model, - Dividend, Earnings, Changes in Dividend is one of the most significant
Dividend model, Return earnings, Changes in dividend determinants of equity share prices followed by
model earnings and changes in earning and dividend has
also strong impact on the changes in dividend.
Stock returns are mostly affected by changes in
dividend followed by changes in earnings.

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 Gallizo and US 2006 Hierarchical Bayesian - Book value per share, Cash flow Book value and cash flows are found to be
Salvador firms listed on the model per share significant determinants of stock prices. The size
NYSE of the firm, dividend, sector, turnover and
earnings affects the relationship of equity share
prices with book value and cash flow.

Edirisinghe and USA 2007 DEA model - ROE, ROA, NPM, Receivables Relative financial strength indicator is a useful
Zhang turnover, IT, AT, CR, QR, tool for selecting investment-worthy industries
DEQ, Leverage, Solvency, PE, and securities for portfolio analysis.
PB, EPS, Revenue growth rate,
Net income growth rate.

Sugiharto et al. Indonesia 2007 Structural equation - Social, Political, Economic, PE is found to be the most popular variable
modeling and Score regulatory, Technological, followed by MVIC/EBITDA, MVIC/Free Cash
based model environmental, Legal factors Flow, price to book Value, dividend,
MVIC/Book Value, MVIC/revenue and price to
sales. There is significant positive relationship
exists between SPERTEL and future value of
equity stocks.

Gay BRIC 2008 ARIMA model - Exchange rate, Oil prices There is no significant relationship found
between exchange rate and oil prices with the
stock prices.

Al-Muraikhi Kuwait 2008 Econometric Model - Exchange rate, Stock prices Technicans and fundamental analysts helps in
and Moosa predicting equity stock prices.

Tripathi Indian Stock Market 2008 Frequency, Percentage - Size, Book to market equity, Fundamental variables related to the company
and Mean score analysis Leverage, P/E significantly influenced the market value of
equity stocks and investors in India generally
considers both fundamental as well as technical
approach while making their investment
decisions.

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 Sarac Istanbul 2008 Factor Analysis, Multiple - 24 fundamental variables Operational leverage, profitability and solvency
regression, Discriminate factors are mostly considered by foreigners while
analysis taking investment decisions, in contrast growth is
not a statistically significant factor. Foreign
investors generally prefer solvency factors while
local investors give more consideration to
profitability indicators at the time of investing in
manufacturing firm stocks.

Fernando Sri Lanka 2008 Multiple regression - Earning, Growth, Leverage, Dividend, retained earnings and company size
model Risk, Company size are the significant determinants of share prices
but growth and risk cannot be measured with
more certainty.
Kazi Australia 2008 Co-integration - Macroeconomic variables Co-integration approach is much better approach
than traditional approach for long term security
pricing.
Pourheydari et Tehran 2008 Multiple Regression - Book value, Dividend, Earnings Dividend, book value and earnings have
al. significant positive impact on the equity stock
prices and dividend is found to be the strongest
determinant.
Bistrova and Baltic 2009 Correlation, Quartile and - ROE, Equity, PE, PB, and ROI, Price earning is the only determinants among all
Lace Indexation. Net debt to assets the determinants that affect the stock prices and
liquidity in the market also affects the stock
market.
Sharma and India 2009 F_ Score - PBIT, TA, ROA, MVE, BVE, Investment strategies based on traditional and
Preeti B/M, CFO, ROA using Cash growth fundamentals are effective in identifying
flow, Sales, Operating Margin, extreme performers and also effective in
CR, DEQ, AT identifying excess return earned by high group
firms and also showed that effectiveness of
growth signals is more in comparison to
traditional signals.

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 Christopher et Nigerian capital 2009 Multiple Regression - EPS, DPS, Crude oil prices, EPS, DPS and GDP have positive linkage with
al. market Model GDP, Lending interest rate, stock prices while lending interest rate and
Foreign exchange rate foreign exchange rate have negative assosciation
with the stock prices.
Chioma Nigeria Stock 2009 Censored Logistic - Income, Inflation, PLR, Inflation rate, macro instability and major
Chukwuma- Exchange Model, Error correction Portfolio flows, Remittances, variables of the health of the firm have less affect
Agu and approach Stock market capitalization, on the equity prices especially in boom period.
Chukwuma Production in OECD countries Profits of firms, amounts paid out as dividend
Agu and regularity of such dividend payout may be
beneficial to predict stock returns to some extent.
Tripathi India 2009 Regression Models - Market capitalization, Book Market capitalization and price earnings have
equity to market equity, PE, statistically significant negative relationship with
DEQ equity returns while book equity to market equity
and debt to equity have statistically significant
positive relationship with equity returns.
Elleuch Tunisian Stock 2009 Spearman correlations - Inventory, AR, Investments, Accounting variables can be beneficial to
market and F_ Score Gross Margin, Labor Force, improve the future returns earned by an investor
ROA, Cash flow, Accruals, and overall sample generating future negative
Leverage, Liquidity, AT returns of a winner portfolio that provide positive
future return can be differntiated from a loser one
generating a negative return.
Nimalathasan Sri Lanka 2009 Exploratory Factor - 21 Fundamental variables Accident ratio followed by Opportunity
Analysis Succession Rate, Cash Flow, ROCE, Customer
Satisfaction Rate, Overall Equipment
Effectiveness, ROI and Internal Promotion
according to their importance has found.
Das and India 2009 Factor Analysis, Multiple - Corporate fundamental ROI, earning power, growth and valuation
Pattanayak regression variables factors have positive impact on share prices
whereas risk and volatility factors had negative
impact on share prices movement of SENSEX
and NIFTY.

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 Martani et al. Indonesia 2009 Correlation and - NPM, ROE, CR, DEQ, PB, TA, NPM, ROE, P/B has positive significant
Regression Model CFO, TAT influence while TAT has negative significant
impact on cumulative abnormal return and on
market adjusted return. Liquidity, leverage, size
and cash flow found to be insignificant
determinants.
Senthil kumar India 2009 Fama and MacBeth Automobile, Size, MBV There is no association found between size and
(1973) Regression Model Cement, stock returns while market to book ratio has
Diversified, significant relation with stock returns in all
Pharmaceuticals, sectors taken under study. There is a combined
Textile impact of size and market to book found
significant in the study.
Oseni Nigerian 2009 Multiple Regression - EPS, DPS, GDP, Lending Earning per share, dividend per share, gross
Model interest rate, Oil prices, domestic product has positive correlation with
Inflation, Foreign exchange rate stock price while there is negative affect of
foreign exchange rate and lending interest rate on
the market price of equity stocks.
Sehgal and Brazil, Russia, 2010 OLS (Ordnary Least Agriculture, EPS, BV and Sales Price to book value is found to be the significant
Pandey India, China, South Square) method Capital goods, determinant of India, China and South Korea
Korea and South Chemcal & while price to earnings has signficant impact on
Africa Petrochemical, equity stocks of Brazil and South Africa. The
FMCG, Finance, result also found that that market regression is
Healthcare, a better tool for forecasting of stock prices as
Housing, IT, compared to sector regression.
M&M, Oil & Gas,
Power, Textile,
Transport
Equipment
Shubiri Jordan 2010 Simple as well as - NAPS, Dividend percentage, Net asset value per share, dividend percentage
Multiple Regression EPS, Lending interest rate, and GDP have positively significant affect on the
Inflation rate, GDP stock prices while inflation and lending interest
rate have negatively significant impact on the
market price of equity stocks.

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 Tavakkoli et al. Iran 2010 Fuzzy Logic Drug industry Fundamental Variables Results obtained with the help of Fuzzy Logic
method approximately were consistent with the
expectations of financial experts.
Pathirawasam Colombo Stock 2010 Cross as well as Pooled Banking, F&I, EPS, BVPS, ROE Earning per share, book value per share and
Exchange regression analysis Food and return on equity as the positive and significant
Beverage, Hotel, determinants of equity stock prices and earning
Manufacturing, per share is found to be most significant
Plantation, Land, fundamental determinant.
Property
Sinaei Tehran 2010 EVC model, EBO model, - Price, Earnings, Invested The result of EBO model signifies that BV and
P/E model, P/S model capital, BV, Cost of capital, EPS has significant impact on market price of
and P/B model ROE, NPM, Beta, Payout, stocks, the results of EVC model reveals that
Market value, Growth, Sale, Net (EVC/c)/IC) is significant determinant of
operating income (MV/IC). The results of P/E model reveal that
Beta, payout ratio and growth rate affects the PE.
The results of P/B model depict that beta, equity
capital return, percent of payout ratio and growth
rate are the significant determinants of price to
book value.
Lee USA 2010 Regression model - Leverage, EPS, BV, MV, ROE Leverage has strong impact on relationship
between earnings and price of equity.
Al-Qaisi Amman Stock 2011 Multiple Regression - Financial profit, Economical Financial ratio, economical ratio and commercial
Exchange profit, Commercial profit, ratio are found to be useful in predicting profit
Exchange ratio, Rapid cash, per share whereas working capital and
Liquidity peremptory, Working peremptory cash ratio and rapid cash are found to
capital be insignificant determinants.
Al-Abduljader Kuwait stock 2011 Regression Model - EPS, PE, PB, DY The trading rule i.e. buys and sell strategy is
and Al- Market usually more beneficial as compared with to buy
Muraikhi and hold strategy.
Nirmala et al. India 2011 Panel data regression Auto, Healthcare DPS, ROA, PE, DE DPS, PE has positive significant and DEQ has
and Public sector negative significant impact on the share prices
for all the sectors while profitabilty is the
signifcant determinant of auto sector only.

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 Sharma India 2011 Correlation and Multiple General BVPS, DPS, EPS, PE, DY, DP, EPS, DPS and BVPS have significant impact on
regression model Engineering, Size in terms of sale, Net worth. the market price of share and DPS and EPS
Cotton Textile, found to be the strongest determinants of market
Chemical, Iron & price.
Steel, Electrical,
Miscellaneous

Shukla and India 2011 Correlation and - BVPS, DPS, EPS, DY, PE, DC, PE, EPS, DPS and DC have the positively
Devani Regression analysis Growth significant impact on the equity share prices
followed by DY and BV whereas growth has
insignificant impact on the equity share prices.

Kheradyar and Malaysian Stock 2011 Panel data model and - Lewellen’s financial ratios The results of separated model showed that DY,
Ibrahim Market Generalized least square namely DY, EY, B/M EY and B/M has significant impact on the stock
returns and B/M has the higher predictability
power of stock returns than the DY and EY and
the result of combined model indicated that the
predictability power of stock returns increases
when financial variables are combined with each
other.

Ebrahimi and Iran Stock Market 2011 Pooled regression, Panel - Earnings, Dividend Earning and dividend are found to be the
Chadegani regression significant determinant of stock returns but
dividend as a significant variable changes
according to time period.

Venkatesh and India 2011 Mean, Standard - Fundamental variables, Mostly respondents consider both fundamental
Tyagi deviation, One way Technical variables and technical analysis while taking investment
ANOVA and Chi- square decisions in securities but use of analysis changes
test according to the conditions of market. In bearish
market, investors mostly rely on fundamental
analysis; on the other hand if there is bullish
market, technical analysis is used by the
investors.

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 Bennet et al. Tamil Nadu, India 2011 Factor analysis, t- test, - Market factors, Earning factors, Return on equity, quality of management, return
One Way ANOVA Decision making factors, on investment, price to earnings ratio are the
Industry related factors, most influencing variables and recommendation
Corporate governance factors, by analyst, broker and research report,
Positioning factors, Image recommended by friend, family and peer,
building factors, Goodwill geographical location of the company and social
factors, Industry competition responsibility are the least influencing variables.

Azam and Karachi, Pakistan 2011 Multiple Regression - EPS, Dividend, Foreign EPS, DP, foreign investment and GDP at growth
Duresh Model investment, GDP at growth rate rate are the four factors which are mostly
consider by investors and EPS, foreign direct
investment, and GDP growth rate have a
positively significant impact on equity share
prices while DY is the insignificant variable.

Varadharajan India 2011 Frequency analysis and - Good corporate earnings, Stock Opinion from family/friends, broker’s
and Vikkraman ANOVA marketability, Stock recommendation and other advice from experts
affordability, Dividend affects the stock returns. There was no
announcements, PE, Momentum relationship found between factors influencing
effect, Contrarian effect, investment decisions and risk appetite and the
Investment behavior of FIIs, result also found that investment behavior of FIIs
Firm’s reputation, Socially alone has a significant impact on trading
responsible investing, Current regularity.
economic, Opinion, broker’s
recommendation, other
professional advice

Sahoo and India 2011 Correlation and Capital Goods, Price Earnings There is negative relationship found between
Chatterjee Regression FMCG, M&M and price earning ratio and stock returns in India. The
Oil, Gas & Power, study also concluded that stocks of companies
Finance, comes under traditional industry have stronger
Healthcare, correlation with price earning as compared to
Housing and IT stocks comes under contemporary industry.

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 Shobhana and Indian stock market 2011 Correlation and multiple - BV, DPS, EPS, PE, DY, DE, Market capitalization and dividend yield have
Karpagavall regression analysis ROCE, Growth, MC, DP, PB, significant impact on the equity prices of ‘A’
Price to cash EPS, Beta, GDP, group shares while book value per share found to
Interest, Inflation, Industrial be significant in the case of group ‘B’ shares.
growth rate
Perera and Sri Lanka 2012 Correlation and - EPS, ROE, EY Investor’s usually consider earning per share,
Thrikawala Regression return on equity and earning yield together while
taking their investment decisions.
Batje and U.S.A 2012 Factor Analysis and - Output, Labor market, Housing, Size, market excess return and momentum
Menkhoff Regression Analysis. Consumption, Order and premium can be forecasted with the help of
inventories, Money and credit, macroeconomic variables but value premium
Bonds and interest, Prices, cannot be forecasted by macroeconomic
Stock market information. determinants.
Gill et al. America 2012 Descriptive Statistics, - BVPS, EPS, DC, DPS, DP, PE, BVPS, EPS, DC, DPS, DP, size, CEO duality,
Regression Analysis Size, CEO duality, and the internationality of the firm have a
Internationality of the firm positive impact on the equity prices of
manufacturing as well as service firms in
America.
Venkates et al. India 2012 F_ SCORE IT, Banking and ROA, CFO, Change in ROA, All individual fundamental variables taken under
Pharmacy Accrual, Change in Leverage, study have positive correlation with future stock
Change in CR, Equity issuance, returns.
Change in GM, Change in AT.

Bhatt and India 2012 Correlation and - EPS There is positive impact of EPS on the market
Sumangala Regression value of an equity share.
Bhattacharjee India 2012 Correlation analysis and 13 different sectors DEQ, Size, Growth, CR, Dividend and size of the companies are positive
Multiple regressions RONW and DP significant determinants of share prices while
leverage, growth, liquidity and profitability are
found to be insignificant fundamental
determinants.

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 Ozlen and ISE 2012 Ordinary least squares Food, Metal TAT, DEQ, CR, NPM, PE and TAT has the positive significant impact on the
Ergun Method products, Metal- BV. stock prices of metal products, metal-main, and
main and chemical-petroleum sector while it has negative
Chemical- impact in communication, transportation and
Petroleum, electric sub sectors. DEQ is the negative
Communication significant determinant in food, metal-main and
Transportation, commerce sector. CR has the positively
Electric, significant variable of metal-main sector while
Commerce have negative impact of commerce sector stock
prices. Stock price movements of energy and
metal-main sectors are highly correlated with the
internal factors whereas, the share prices of
commerce sector are found to be the least
dependent on internal factors.

Dabade India 2012 Correlation and - EPS, ROCE, CFO Earning per share and return on capital employed
Regression is the significant determinants of equity share
prices in India.

Mahmoud and Egyptian Stock 2012 F_SCORE - ROA, Change in ROA, CFO, There is positive and significant relationship
Sakr Market Accruals, Change in leverage, exists between F_ SCORE and return on equity
Change in CR, Cash flow from but F_ SCORE is not attributed to risk factors
stockholders, Change in AT, such as beta and book to market value. The
Change in GPM, Change in strategy based on cash flow from operation and
CFO accruals outperforms the strategy based on
F_SCORE in analysis.

Sultana and India 2012 Factor analysis, - 40 attributes Individual eccentric, wealth maximization, risk
Pardhasaradhi Frequency, Mean minimization, brand perception, social
responsibility, financial expectation, accounting
information, government and media, economic
expectation and advocate recommendation are
factors extracted.

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 Zaheeruddin India 2012 Mean and Standard Software Risk and return, Fundamental In recession period the IT firm has faced a
and Sivakumar deviation factors situation of negative returns and in recovery
period there is scenario of positive returns.
Recession and political anarchy present in the
economy affects the market value of equity
stocks of software industry in India.
Hossain and Bangladesh 2012 Factor analysis, - Accounting information, Company specific attributes/reputation, net asset
Nasrin independent sample t- Company attributes, Publicity, value and accounting information are the most
test and ANOVA ownership Structure, Influence influencing factors and level of value given to
of people, Trading opportunity, each of the factors excluding ownership structure
Personal financial needs, significantly differs with at least one
Market variables, Convenience, demographic character of retail investor’s like
NAV gender, age, occupation, income, education, and
experience.
Kukreja India 2012 Factor analysis and Chi- - Investment influence, Educational qualification has significant related
square test Convenient investment, with transparency of transaction in cash market,
Investment benefit, Service tax advantage in cash market, past performance
satisfaction, Client service, of the company in cash market. Occupation has
Charges and Liquidity, significant influence on investment pattern in
Investment, Satisfaction of cash market, services of the stock broker in cash
alternate choices, Stock broker market, risk and uncertainty in future & option,
attitude, Client attitude size of investment in future & option, services of
the stock broker in future & option. Age has
significant influential role on cash market, future
& option, life insurance.
Srinivasan India 2012 Panel data Regression - DPS, EPS, PE, Firm Size, There is a negative and significant impact of DPS
Model BVPS, Time trend. on the stock prices of manufacturing,
pharmaceutical, energy and infrastructure sectors
and EPS and PE are significant indicators of
equity share prices of manufacturing,
pharmaceutical sector, energy, and infrastructure
and banking sectors and size and the BVPS has
significant impact on the equity share prices.

  37
 Dawar India 2012 Correlation and Automotive DPS, BV, RE, DEQ, EPS, Dividend policy and investment policy are
Regression Capital expenditure relevant for explaining stock price behavior as
compared to financing policy.
Uwuigbe et al. Nigeria 2012 Correlation, Multiple - ROA, DP, DEQ ROA and DP have the positive and significant
regression impact on market price while DEQ has negative
significant effect on equity share prices.
Malhotra and India 2013 Correlation, Multiple - BV, EPS, DPS, DC, DY, PE BV, EPS, PE and DY are the significant
Tandon regression determinants of the stock prices while DC and
DPS are found to be insignificant fundamental
determinants.
Limento and Indonesia 2013 Pooled Regression Model Transportation ROA, ROE, NPM, DER, TAT, TAT and EPS are the two indicators that have
Djuaeriah CR, PBV, EPS, Inflation, GDP, positively significant impact on the stock price
Risk free rate (SBI) movement in Indonesian market while ROA,
ROE, NPM, CR, DER, PBV, Inflation, SBI and
GDP found to be insignificant determinants of
stock price.
Motwani India 2013 Mean score, Z- score, t- - Financial performance and Financial performance, policy and information
test policy, Quality of management, dissemination are the factors that are mostly used
Dissemination of information by small and infrequent investors followed by
and Governance, ethical governance and ethical practice of the company.
practices
Khaparde and India 2014 Cross tabulation, - GDP, Exchange Rate, Inflation, Mostly investors believe that macroeconomic
Bhute Percentage FII, Money Supply factors influence the behavior of stock market.
Almumani Amman Stock 2014 Correlation, Multiple Banking DPS, EPS, BV, PE, Size (in EPS, BV and PE have the positive significant
Exchange Regression terms of total asset), DP impact on equity share prices while size has
negative association with market value of equity
stocks. DPS and DP are found to be insignificant
determinants.

  38
 Analysis and Findings

Table 2.1 presents the country-wise, year wise basis list, methodology and variables
used in publications and the result observed that large number of studies are carried out
in New York, USA, UK followed by Nigeria, Japan, Iran, Korea, China, Sri Lanka and
Bangladesh etc. The result depicts that fundamental analysis do not only concentrates
in the developed countries but also widen its scope in the developing countries. Initially,
the study was concentrated in the developed nations. There is increase in number of
studies from the year 1980 to 2014 regularly. Results also revealed that studies have
been carried out in Banking, IT, FMCG, Capital goods, Healthcare, Pharmaceutical,
Automotive sectors etc. There are lots of measuring tools available for analyzing
fundamental determinants namely correlation, regression, and other techniques were
mostly used to examine the association of fundamental determinants with equity share
prices.

Summary and Conclusion

The importance of fundamental analysis has grown continuously and its significance
can be seen from the increasing number of research studies regularly. From the
literature, it is clear that fundamental analysis play significant role in determining the
value of equity stocks. Table 2.1 shows that a variety of micro and macro fundamental
determinants of share prices has appeared for different markets like liquidity, dividend
per share, retained earnings, size of the firm, earnings per share, dividend yield,
leverage, dividend payout, book value per share, return on asset, foreign exchange rate,
gross domestic product, lending interest rate, availability of substitutes, government
policy, mergers and takeovers, investor sentiments, management and technical
influences etc.

The research studies reviewed here have attempted to examine the relationship between
equity share prices and fundamental determinants. In India, comparatively less number
of studies has attempted to examine the relationship between fundamental determinants
and stock prices and the empirical findings were also vary from study to study
depending upon the choice of the firms, sample period and methodology chosen for
empirical study. The studies reviewed in present study conclude that a large number of
research issues on fundamental analysis are not yet addressed abundantly, especially in
India. However, there are only few studies which analyzed company specific
fundamental determinants in India. Further, time period covered and sample size used

  39
 in the previous studies is not adequately large to draw conclusion. Mostly studies were
based on secondary data i.e. data collected from company annual reports. However,
some of the studies were depends on primary data as well to collect information
through questionnaire, but not so much especially related to know influential level of
these fundamental variables. There are very few studies which have conducted in past
to identify fundamental determinants on basis of company wise as well as industry wise.
Mostly previous study are based on either cross sectional data or time series data or by
taking average of data, a very few studies have conducted under which cross sectional
as well as time series data were taken together. Perception of investors regarding
company specific fundamental variables has mostly ignored in the past studies. Hence,
the fresh studies need to be conducted in regard to above areas of fundamental analysis.
The present study is a humble effort in this regard.

Future Directions and Areas of Research

From the foregoing discussion, it is clear that awareness regarding fundamental

variables has increased in the last few years and there have been a variety of area
related to pricing of stock where research has been carried out. But despite the fact that
fundamental analysis have been carried out in different countries, there are number of
other related areas which needs to be focused. There are some of the related areas
where future research may be carried out. All the individual as well as institutional
investors should have knowledge of stock pricing techniques as well as of fundamental
determinants of stock prices before investing. It influences their decision of investing in
stock market and helpful for them in making their rational investment decisions in
equity stocks. From the review, it can be observed that the present models for analyzing
fundamental determinants do not fully capture it. Few of the models require data which
is not possible for an external person to collect it. So, the models need to be improved
or rectified for their wider application.

An extensive review of literature on fundamental determinants implied that very few

studies have done in the past to analyze the company specific fundamental determinants:
individual company wise as well as industry wise in India. The review also revealed
that till date no specific study has covered the perception of investors regarding
company specific fundamental variables in Indian Stock market. Hence the present
study seeks to fill the research gap in the literature by exploring the various company
specific fundamental variables in India.

  40
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