CHAPTER ONE INTRODUCTION This chapter contains the introduction, background of the study, problem statement, the research

objectives, research questions, research hypothesis, significance,

conceptualization and operationalization of the study. Furthermore it describes the limitations of the research.

1.1.

Introduction

The stock exchange has been perceived by many as the backbone for most contemporary economies, serving a critical need of raising capital funds for companies at a reasonably low cost as compared to other sources of finance such as borrowing. The stock exchange serves two critical functions; it provides a critical link between companies that need funds to set up new businesses or to expand their current operations and investors that have excess funds to invest in such companies and it provides a regulated market place for buying and selling of shares at prices determined by supply and demand, notwithstanding other macroeconomic fundamentals such as interest and inflation rates. To meet their short-term cash requirements corporations usually borrow from banks. However, when corporations need long term financing they may sell their ownership interests in the company to the public, or borrow from the public by selling bonds. Stocks exist to enable companies in need of long term financing to sell pieces of their business as stock (equity securities) in exchange for cash. This is the principal method for raising capital other than issuing bonds. These publicly held shares could be traded to other investors on the stock market.

Stocks are just one kind of financial instrument. Therefore stock market is a public entity for the trading of company stock (shares) and derivatives at an agreed price; these are scurrilities listed on a stock exchange as well as those only traded privately. Stock market is one of the most important sources for companies to raise money. This allows

businesses to be publicly traded, or raise additional financial capital for expansion by selling shares of ownership of the company in a public market. An economy where the stock market is on the rise is considered to be an up-and-coming economy. So stock market is often considered the primary indicator of a country's economic strength and development. The Sri Lanka Stock Market has become very important as an investment vehicle for both local and international investors. In the Colombo Stock Exchange (CSE) is the organization responsible for the operation of the stock market within the country. A Stock exchange provides facilities for stock brokers and traders to trade stocks, securities and other financial instruments. So CSE is one of the most modern exchanges in south Asia, providing a fully automated trading platform. As of 1st September 2013, the Colombo Stock Exchange had 288 listed companies representing 20 business sectors with a market capitalization over 24 billion US dollars and it also has branches across the country in Kandy, Matara, Kurunegala, Jaffna and Negombo.

1.2.

Background of the study

After a number of studies there is still a gap regarding the relationship between the determinants of share price, and so far this topic is open for discussion. According to Modigliani and Miller (1958) firms share price is based upon its earnings, firms value is unrelated with dividend policy. John and Williams (1987) reported that the MM,s statement will only be true when managers pass all the informations including positive and negative to their company shareholders. Mangers disclose just positive information not negative; they will not disclose any negative information until any regulation forces them.

There are some factors affecting to share price those factors can be categorize in to two sub parts those are Micro Factors and Macro factors. This study is an attempt to identify

the Microeconomic factors influencing the share prices and examine the relationship of explanatory variables with those of stock price.

The stock market is all about dynamics and that is why investors and fund managers have been time and again confronted with the problem of accurately predicting the stock prices so as to earn decent returns. Investment in shares offers the benefit of liquidity as well as the opportunity to beat the market and earn high returns. But the task of predicting share prices is far from simple. Share price movement is not independent in nature and both intrinsic as well as extrinsic factors have been established to exercise influence over stock price movements. The pioneering work on determinants of share prices by Collins (1957) for US banks identified dividend, net profit, operating earnings and book value as the factors influencing share prices. Following Collins (1957), there have been various attempts to identify the determinants of share prices for different markets.

According to stock valuation models, the current price of an equity share is equal to the present value of all future cash ows to that share. In this thesis the researcher consider only micro economic factors which effects to share prices.Changes in the microeconomic environment affect the expected cash ows and/or the required rate of return to a share, which, in turn, affects the current price of a share. Further, the arbitrage pricing theory of Ross (1976) posits relations between stock prices and certain microeconomic variables. Friedman (1988) and Mishkin (1998) also argue for the roles of equity markets in the specication of money demand and in monetary transmission mechanisms, respectively. Further, the semi-strong version of the efcient market hypothesis due to Fama (1965) asserts that share prices behave in such a manner that they are not predictable from publicly available information. The above provide the background or the foundation for empirical studies examining the relationship between stock prices and microeconomic factors.

Identification of microeconomic factors which effects to the share prices is very important to the companies. Lot of work has been done on this topic, but almost all the authors have taken just dividend policy as a independent variable to find how it effects the share prices, but the study on relationship of different variables such as size, asset growth, return on asset is not so much taken into consideration.

1.3.

Research Problem

This study investigates the impact of Microeconomic factors on share prices of the companies under the Tourism Sector of Sri Lanka. The study finds that share prices of sample companies, which are categorized as Tourism sector within the Sri Lankan Business System during 2008-2012. The researcher observe that during the last five years major hotels share prices are not stable following graphs will describe,

2012 Hunas Falls Kandy Hotel Corporation Hotel Sigiriya Galadari Hotel Renuka City Hotel 59.6 6.9 36.5 29.1 218.9

2011 85 237.8 23.43 29.1 332.7

2010 52.5 50.25 22.45 35.8 241

2009 33.75 110 24.5 15 78

2008 27.5 71 32 6.25 98

350 300 250 200 150 100 Galadari Hotel Renuka City Hotel 2012 2011 2010 2009 2008 Hunas Falls Kandy Hotel Corporation Hotel Sigiriya

50
0

As per the above graphs during last five years Tourism industry hotels share price not stable therefore the researcher has taken microeconomic factors which are affects to share price. The industry specific relationship between Microeconomic factors and share price is important for both researchers and managers. Does there is an impact of Microeconomic factors and share prices?

1.4.

Importance of the study

To the tourism sector

Share price is a hot topic in the modern business world the share price will provide competitive advantage than other assets in the context of Tourism sector. Improving or keeping stable share price will lead to favorable perception in the mind of investors and customer. As well as can expand their market growth rate and market size. Among the service sector, the Tourism sector is perhaps the largest one that caters to the needs of people belonging to all sections of society. Moreover share price tends to play a significant role in high involvement industry like Tourism.. As a result of that the

researchers findings will contribute to increase the knowledge base regarding the impact of Microeconomic factors on share price in the Tourism industry.

1.7.2. To the stakeholders

The study will also benefit the other stakeholders by allowing them to understand the real meaning of share prices, Microeconomic factors and how those are impact on the share price. Accordingly, they can invest more profitable organization within the Tourism sector. This study will play critical role to identifying best performer in the industry.

1.7.3. Academically

As successful finance graduate, the researcher should have possibility to apply theoretical marketing knowledge into practical scenario. So, this study attempts to know how to apply theoretical knowledge into a practical scenario of identifying Share price, Stock Market and Microeconomic factors will be an advantage than others in service sector. Finally this can also be helpful for the students who are interested in enhancing their knowledge on Stock Market, Share price and Microeconomic factors while enabling them to successfully meet the challenges when they become future managers through giving them an in depth knowledge.

1.5. Objectives of the Study Main

To determine whether there is a relationship between Microeconomic factors and share price in Tourism sector.

Specific

To identify whether there is an impact of dividend on share price. To identify whether there is an impact of net profit on share price To identify whether there is an impact of operating earnings on share price To identify whether there is an impact of book value on share price

1.6. Limitations of the study Followings have been identified as potential limitations.

The share price is not only depends on Microeconomic factors. There are various other factors which affect to the share price but this study concern only the micro economic factors.

Time constraint is effect to the research and it is one of the major barriers of the Researcher also had to do this study within limited time frame. Limited resources. Unable to get the information, due to rules and regulations of the companies and Sri Lanka Stock Exchange.

There may be some minor errors when it comes to measuring the share price.

1.7. Chapterization

From the first chapter, a general introduction and the background which leads to the researcher to conduct this research has been mentioned. Further research problem, major research objective, specific research objectives. Finally, the significance and limitation of this research have been stated.

The second chapter refers to all the literature that has been published about Macroeconomic factors and share price.. The third chapter discusses about the methodology that the researcher used to conduct the research. There are types of data, population, sample, data collection methods and data analysis methods.

The fourth chapter dedicates for the data presentation, analysis, and discussion. Here statistical and descriptive methods have been used.

Finally, the chapter five concludes the research problem and gives some recommendation to the major research problem.

2. CHAPTER TWO LITERATURE REVIEW

This chapter contains theories principles, and previous researchers findings regarding share price, Microeconomic factors and how it effect on share price in the tourism sector.

2.1. Share Price

A share price is the price of a single share of a number of saleable stocks of a company, derivative or other financial asset. The cost of purchasing a security on an exchange, Stock prices can be affected by a number of things including volatility in the market, current economic conditions, and popularity of the company (MacKinlay A. C, 1988).

2.1.1. Theory of Stock Price Behavior

2.2. Microeconomic Factors

The branch of economics that analyzes the market behavior of individual consumers and firms in an attempt to understand the decision-making process of firms and households. It is concerned with the interaction between individual buyers and sellers and the factors that influence the choices made by buyers and sellers. In particular, microeconomics focuses on patterns of supply and demand and the determination of price and output in individual markets (e.g. coffee industry) () 2.2.1. Book Value

The book value of an asset is its value on a company's balance sheet. This may be different to its market value. The usual method for fixed assets is to value them at cost minus depreciation. The book value of a stock, also called net book value or net asset value, is the book value of the listed company's total assets minus its total liabilities. In balance sheet terms, this is equal to the company's shareholders' equity, also called net assets or net worth. Book value per share (BVPS), also called net asset value per share (NAV), is the book value divided by the number of outstanding shares. If a company's share price

falls below its BVPS or NAV, the market is pricing the company below the net value of its assets. Research analysts sometimes measure this relationship using the price/book ratio, which is the share price divided by the BVPS. A price/book ratio below 1 may mean the stock is undervalued (AL-Omar and AL-Mutairi, 2008)

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 net investment per share made in the business by the shareholder. It is the value at which an asset is carried on a balance sheet.

It can be calculated as follows: BV =(Reserves + Equity Capital Revaluation Reserves) No. of outstanding shares No. of outstanding shares is the total number of equity shares held by the company (Malhotra N & Tandon K, 2013). 2.2.2 Dividend

A distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders. The dividend is most often quoted in terms of the dollar amount each share receives (dividends per share). It can also be quoted in terms of a percent of the current market price, referred to as dividend yield (Srivastava, 1984).
Dividend per share (DPS) Dividend is the portion of the profit after tax, which is distributed to the shareholders for their investment bearing risk in the company. It has a significant influence on the market price of the share. DPS shows how much the company has paid out as dividend. 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. DPS is calculated as under:

DPS = Dividend t,n / No. of outstanding shares

(Malhotra N & Tandon K, 2013).

2.2.3 Net Profit

Net profit, also referred to as the bottom line, net income, or net earnings is a measure of the profitability of a venture after accounting for all costs. Often referred to as the bottom line, net profit is calculated by subtracting a company's total expenses from total revenue, thus showing what the company has earned (or lost) in a given period of time(usually one year) (Collins, 1957).

2.2.4. Operating earnings

Profit earned after subtracting from revenues those expenses that are directly associated with operating the business, such as cost of goods sold, administration and marketing, depreciation and other general operating costs. Operating earnings are an important measure of profitability, and since this metric excludes non-operating expenses such as interest and taxes, it enables an assessment of the company's core business profitability to be made (Collins, 1957).

Relationship

The pioneering work on share price determinants by Collins (1957) for US identified dividend, net profit, operating earnings and book value as the factors influencing share

prices. Following Collins (1957), there have been various attempts to identify the determinants of share prices for different markets. Such studies and the factors Identified as share price determinants are summarized in table 1. S.No 1 Study Zahir & khanna Factors affecting share prices Year Market India

Dividend per share, yield, book 1981 value

2 3

srivastava Balkrishan

dividend

1984

India India

Book value & dividend per 1984 share

Chawla &srivasan

Dividend & retained earnings

1984

India

karathanossis & Dividend,retained,earnings,size philippas

1988

Greece

Midani

Earnings per share, Financial 1991 leverage

Kuwait

7 8

Zahir Infan & mishat

Dividend, earning & yield

1992

India Pakistan

Dividendyied,leverage,payment 2002 ratio, size

Syed Atif Ali,( 2012) investigates the relationship and impact of companys internal factors on the stock prices. To achieve their objectives they have taken 6 years data from 7 different sectors of business and these sectors includes 35 companies. According to their regression results return on equity have insignificant impact on share prices and net profit margin, current ratio and total asset turnover as independent variables have significant impact on share price.

3. CHAPTER THREE METHODOLOGY

This chapter addresses the research design, data collection methods, population, sample, types of collected data. Furthermore it contains the data presentation and analysis methods which were used in this study.

3.1. Research Approach In the first step extensive literature survey was conducted to find out the variables which affect the share price. Moreover through the literature survey the researcher has identified the theoretical framework which suits to current problem.

Second, after identifying the variables and theoretical framework appropriate to the research problem, the research objectives and research questions have developed. Then the researcher has determined the source of data which is relevant to current study.

Third, the researcher has collected data from the annual reports of the selected sample. Finally, analyzes using statistical software and give recommendation to the problem context.

3.2. Research design According to Jaipuria (2007) a research design explained as the detailed blueprint used to guide a research study toward its objectives (p. 04). The research design involves a series of decisions including the determination of type, purpose, setting, time horizon and data source used for the study etc.

3.2.1. Type of the study

The type of the study is Explanatory and descriptive nature. The study can be explanatory when the focus is on cause-effect relationships, explaining what causes produce what effects. Explanatory type of research is grounded in theory, and theory is created to answer why and how questions (Sekaran & Bougie, 2012, p. 103). The researcher has chosen quantitative approach for achieving the purpose of the study. Quantitative research approach is based on the development of testable hypotheses and theory. Quantitative investigations tend to measure how often or how much. According to Wang and Lo (2002) the research adopted quantitative approach allowed the researcher to search for truths of the observation by empirical evidence via the hypothetic-deductive method and the extant literature that is relevant to this research was well developed. 3.2.2. Purpose of the study

The prime purpose of this study is to study microeconomic determinants of share price in tourism industry and to examine their functional relationships.

3.2.5. Data source used for the study

The researcher has used primary and secondary data to conduct this research.

Primary No

Secondary The secondary data played big role to conduct this research, but researcher collected some secondary data thorough Journal, article, company annual report, IT systems and previous researches in order to conduct this research

3.3. Sample Plan The sample plan has been explained under the major areas of population, sample unit, sample frame, sampling method, sampling procedure and sample size.

3.3.1. Population of the Study Current study population consists with 41 hotels which are registered with Colombo share market Sri Lanka.

3.3.2. Sample Unit Researcher selected hotels those have registered with CSE for this study; therefore a single hotel with CSE registration is the sample unit.

Number of Hotels registered with CSE

No.of Selected hotels

41

10

3.3.3. Sample Frame The list of hotels which were registered with the Colombo stock exchange Sri Lanka was taken as the sampling frame.

3.3.4. Sampling method and procedure The sample of this research is formed by the hotels which are registered with the CSE. The researcher used convenient sampling method to collect data from the population of this research. Convenient sampling is a non - probability sampling method which refers to the collection of information from members of the population who are conveniently available to provide it. Convenient sampling is more convenience and low cost involvement (Sekaran & Bougie, 2012, p. 276). The researcher collected the data from hotels which have registered with CSE particular time period which is from 01st of October to 15th of November in 2013.

3.3.5. Sample Size

Yamane as cited in Glenn (1992) provides a simplified formula to calculate sample sizes. This formula was used to calculate the sample sizes. A 95% confidence level and P = .5 are assumed for the bellow mentioned Equation.

(n - Sample Size, N Population, e Level of Precision The researcher derived minimum sample size based on above equation which is 10.

3.9. Data collection methods The researcher used the fallowing major sources to gather essential information with the purpose of achieving research objectives and to get the practical insights to the research problem.

Secondary Data

Secondary data was the major data source in this study those data collected from company annual reports and web sites.

3.2 Conceptual Frame Work An analytical model is a set of variables and their interrelationships designed to represent, in whole or in part, some real system or process (Malhotra, 2006, p. 2).The researchers have developed a conceptual frame work for this research based on the research variables, such as Microfactors and Share price. A conceptual framework indicates how the researcher views the concept involved in a study especially the relationship between concepts (Jais & Sebastian-Dominik, 2007, p. 153).

Based on the research objectives and the literature review, the conceptual model was constructed as indicated in figure 1.

The Figure 1.2 presents the conceptual framework of share price and suggests that: book value, Net profit, Dividend and Operating earnings are related to share price (Collins,

1957). In the following section the researcher discuss the theoretical underpinnings for conceptual framework and outline the hypotheses for study. This study was previously carried out by Collins (1957). Data for examine the effects of Microeconomic factors of on share price. The paper finds Microeconomic factors ( book value, net profit, operating earnings and dividends are positively related to share price.

Figure 3.1 Research Framework Microeconomic Factors

Dividend

Net Profit
Share Price Book Value

Operating Earning

3.4 Hypothesis of the study A hypothesis can be defined as a tentative, yet testable, statement, which predicts what you expect to find in your empirical data. Hypothesis are derived from the theory on which conceptual model is based and are often relational nature (Sekaran & Bougie, 2012, p. 67).

To achieve the overall and specific objectives of this research study the researcher developed a set of hypothesis. These hypotheses were then tested with the resulted obtained from the correlation analysis between Independent Variables and Dependent Variables. In the present study the researcher proposes following hypothesis:

H0: There is no positive relationship between Microeconomic factors and share price in tourism sector H1: There is a positive relationship between Microeconomic factors and share price in tourism sector

H0 : There is no positive relationship between dividend and share price. H2 : There is a positive relationship between dividend and share price.

H0 : There is no positive relationship between net profit and share price. H3 : There is a positive relationship between net profit and share price.

H0 : There is a positive relationship between operating earnings and share price. H4 : There is a positive relationship between operating earnings and share price.

H0 : There is a positive relationship between operating earnings and share price. H4 : There is a positive relationship between operating earnings and share price.

3.? Dependent Variable Share price A share price is the price of a single share of a number of saleable stocks of a company, derivative or other financial asset. The cost of purchasing a security on an exchange, Stock prices can be affected by a number of things including volatility in the market, current economic conditions, and popularity of the company (MacKinlay A. C, 1988).

3.10. Data analysis and Data presentation 3.10.1. Data presentation The researcher used the frequency tables, percentages, bar charts and multitude for data presentations. 3.10.2. Data analysis Multiple Regression and correlation analysis was conducted. SPSS statistical package was used to analyze the data.

3.17. Regression analysis Regression analysis was used to find out the most important dimensions of Microeconomic factor that influence share price. The regression model always indicates by how much (Beta value) each independent variable could affect the dependent variable. The researcher used multiple regression method to examine the microeconomic factors and share price since there is more than one independent variable. The proposed regression model for the present study can be expressed as follows. Equation 3.2 Regression model

SP

a b1 xdividend b2 xnetprofit b3 xbookvalue b4 xoparatingearning u

Where; y = Share Price x = Microeconomic factors (Dividend, Operating earnings, Book Value, Net profit) a = Constant u = Error term 3.18. Pearsons Co-efficient of Correlation Analysis Pearsons Co-efficient of Correlation Analysis used to find out the relationship between Microeconomic factors and Share price.

If the Pearsons coefficient of correlation is close to 1 (> 0.5) with a high significant level (F< 0.05) then, there is a strong positive relationship between the two variables, r = +1 data lie on a perfect straight line with a positive slope. If the Pearsons coefficient of correlation is close to -1 (> - 0.5) with a high significant level (F< 0.05) then, there is a strong negative relationship between the two variables, r = -1 data lie on a perfect straight line with a negative slope. If the Pearsons coefficient of correlation is close to 0 (<-0.5 or 0.5) with a high significant level (F< 0.05) then, there is no positive or negative relationship between the two variables, but not so strong, r = 0 no linear relationship between the variables (Malhotra, 2006).

1. ^ Lo, A. W.; A. C. MacKinlay (1988). "Stock market prices do not follow random walks: evidence from a simple specification test". Review of Financial Studies 1 (1): 41 66. doi:10.1093/rfs/1.1.41.ISSN 0893-9454.