IMPACT OF FIRM PERFORMANCE ON STOCK RETURNS: EVIDENCE FROM LARGE-CAP, MID-CAP AND SMALL-CAP STOCKS

Muhammadriyaj Faniband; Pravin Jadhav; Kedar Marulkar

doi:10.46281/ijfb.v13i1.1969

Muhammadriyaj Faniband PhD Research Scholar, Institute of Infrastructure, Technology, Research and Management, Ahmedabad-380026, India https://orcid.org/0000-0001-6775-3582
Pravin Jadhav Assistant Professor, Institute of Infrastructure, Technology, Research and Management, Ahmedabad-380026, India https://orcid.org/0000-0002-5732-2217
Kedar Marulkar Assistant Professor, Department of Commerce and Management, Shivaji University, Kolhapur, India https://orcid.org/0000-0003-3431-0210

DOI: https://doi.org/10.46281/ijfb.v13i1.1969

Keywords: Firm Performance, Net Sales, Net Profit, EPS, Stock Return.

Abstract

In this article, we analyse the impact of firm specific factors, namely, total income, net profit, and earnings per share (EPS) on stock returns of companies from the large cap, mid-cap and small- cap (LMS) categories using the panel quantile regression. We also use the ordinary least square method to compare our panel regression results. We select companies from NSE Large Cap100, NSE Mid Cap 100 and NSE Small Cap 100 Indices and each index is composed of 100 companies. These indices reflect the overall state of the Indian stock market. Our empirical analysis based on quarterly data from June 2010 to March 2022 shows some important findings. First, net sales significantly and negatively affect stock returns across the large, mid, and small cap stocks. Second, net profit and EPS have a substantial and positive impact on companies from all the categories. However, the coefficients are not significant across all quantiles. In short, the impact of firm specific factors on stock returns is not homogeneous across the LMS stocks implying that these factors do not influence stocks in a uniform way. The plausible reason may be that large, mid, and small cap companies share differences in terms of market capitalisation, growth potential and volatility.

JEL Classification Codes: C31, G11, G12, G32, L25.

References

Anwaar, M. (2016). Impact of Firms’ Performance on Stock Returns (Evidence from Listed Companies of FTSE-100 Index London, UK). Global Journal of Management and Business Research, 16(1), 1–10.

Arouri, M., Estay, C., Rault, C., & Roubaud, D. (2016). Economic policy uncertainty and stock markets: Long-run evidence from the US. Finance Research Letters, 15, 99–105. https://doi.org/10.1016/j.frl.2016.04.011

Baber, W. R., Chen, S., & Kang, S. H. (2006). Stock price reaction to evidence of earnings management: Implications for supplementary financial disclosure. Review of Accounting Studies, 11(1), 5–19. https://doi.org/10.1007/s11142-006-6393-0

Babu, C., & Kasilingam, R. (2013). Impact of quarterly results on share prices. Indian Journal of Finance, 7(3), 19–30.

Budi, H. S. M., & Davianti, A. (2022). Firms’ Profitability and Stock Returns: Does it Always Affect Positively? International Journal of Social Science and Business, 6(1), 103–109. https://doi.org/10.23887/ijssb.v6i1.41927

Chellaswamy, K. P., Natchimuthu, N., & Faniband, M. (2020). Stock Market Sensitivity to Macroeconomic Factors: Evidence from China and India. Asian Economic and Financial Review, 10(2), 146–159. https://doi.org/10.18488/journal.aefr.2020.102.146.159

Choiriyah, C., Fatimah, F., Agustina, S., & Ulfa, U. (2021). The Effect Of Return On Assets, Return On Equity, Net Profit Margin, Earning Per Share, And Operating Profit Margin On Stock Prices Of Banking Companies In Indonesia Stock Exchange. International Journal of Finance Research, 1(2), 103–123. https://doi.org/10.47747/ijfr.v1i2.280

Christou, C., Cunado, J., Gupta, R., & Hassapis, C. (2017). Economic policy uncertainty and stock market returns in PacificRim countries: Evidence based on a Bayesian panel VAR model. Journal of Multinational Financial Management, 40, 92–102. https://doi.org/10.1016/j.mulfin.2017.03.001

Dakhlaoui, I., & Aloui, C. (2016). The interactive relationship between the US economic policy uncertainty and BRIC stock markets. International Economics, 146, 141–157. https://doi.org/10.1016/j.inteco.2015.12.002

Duz Tan, S., & Tas, O. (2021). Social Media Sentiment in International Stock Returns and Trading Activity. Journal of Behavioral Finance, 22(2), 221–234. https://doi.org/10.1080/15427560.2020.1772261

Faniband, M. M., & Marulkar, K. V. (2020). Quarterly results and share prices: What happens on the date of earnings announcement. Finance India, 34(1), 153-162.

Faniband, M. M., & Marulkar, K. V. (2019). Do Quarterly Numbers Impact The Share Price on the Date of Earnings Announcement ? A Panel Causality Approach. Prajnan, 48(2), 123–134.

Ftiti, Z., & Hadhri, S. (2019). Can economic policy uncertainty, oil prices, and investor sentiment predict Islamic stock returns? A multi-scale perspective. Pacific Basin Finance Journal, 53, 40–55. https://doi.org/10.1016/j.pacfin.2018.09.005

Istiak, K., & Alam, M. R. (2020). US economic policy uncertainty spillover on the stock markets of the GCC countries. Journal of Economic Studies, 47(1), 36–50. https://doi.org/10.1108/JES-11-2018-0388

Koenker, R., & Bassett, G. (1978). Regression Quantiles. Econometrica, 46(1), 33–50.

Kumar, R. (2015). Effects of Declaration of Quarterly Results on Share Price of Selected Automobile Companies. Abhinav National Monthly Refereed Journal of Research in Commerce & Management, 4(3), 33–41. https://doi.org/10.4028/www.scientific.net/KEM.243-244.45

Li, R., Li, S., Yuan, D., & Yu, K. (2020). Does economic policy uncertainty in the U.S. influence stock markets in China and India? Time-frequency evidence. Applied Economics, 52(39), 4300–4316. https://doi.org/10.1080/00036846.2020.1734182

Menaje Jr., P. M. (2012). Impact of Selected Financial Variables on Share Price of Publicly Listed Firms in the Philippines. American International Journal of Contemporary Research, 2(9), 98–104.

Nasreen, S., Tiwari, A. K., Eizaguirre, J. C., & Wohar, M. E. (2020). Dynamic connectedness between oil prices and stock returns of clean energy and technology companies. Journal of Cleaner Production, 260, 121015. https://doi.org/10.1016/j.jclepro.2020.121015

Nayak, D., & Barodawala, R. (2021). The Impact of Macroeconomic Factors on the Indian Stock Market : An Assessment. Arthshastra Indian Journal of Economics & Research, 10(2–3), 27–40. https://doi.org/10.17010/aijer/2021/v10i2-3/167172

Ni, Z. X., Wang, D. Z., & Xue, W. J. (2015). Investor sentiment and its nonlinear effect on stock returns-New evidence from the Chinese stock market based on panel quantile regression model. Economic Modelling, 50, 266–274. https://doi.org/10.1016/j.econmod.2015.07.007

Ortiz, C., Ramírez, G., & Vicente, L. (2010). Quarterly return patterns in the Spanish stock market. Applied Financial Economics, 20(23), 1829–1838. https://doi.org/10.1080/09603107.2010.528366

Rokhayati, I., Lestari, H. D., Harsuti, H., & Rosadi, W. (2021). Why Stock Returns on Property and Real Estate Companies on BEI? Jurnal Ilmiah Universitas Batanghari Jambi, 21(3), 1228. https://doi.org/10.33087/jiubj.v21i3.1646

Santoso, B., Sidharta, E. A., & Wardini, A. K. (2020). The impact of Fundamental Factors on Stock Return of The Engineering and Construction Services Company. Jurnal Organisasi Dan Manajemen, 16(2), 158–170. https://doi.org/10.33830/jom.v16i2.818.2020

Saputra, F. (2022). Analysis of Total Debt, Revenue and Net Profit on Stock Prices of Foods And Beverages Companies on the Indonesia Stock Exchange (IDX) Period 2018-2021. Journal of Accounting and Finance Management, 3(1), 10–20. https://www.dinastires.org/JAFM/article/view/64

Sausan, F. R., Korowajiyanti, L., & Ciptaningtias, A. F. (2020). The Effect of Return on Asset (ROA), Debt to Equity Ratio (DER), Earning per Share (EPS), Total Asset Turnover (TATO) and Exchange Rate on Stock Return of Property and Real Estate Companies at Indonesia Stock Exchange Period 2012-2017. Ilomata International Journal of Tax and Accounting, 1(2), 103–114.

Sharma, G. D., Mahendru, M., & Singh, S. (2015). Impact of Sales, Net Profit, and EPS on Stock Behavior in Emerging Markets : A Study of Indian Companies. Indian Journal of Research in Capital Markets, 2(4), 7–19. https://doi.org/10.17010/ijrcm/2015/v2/i4/102614

Sudirman, Kamaruddin, & Possumah, B. T. (2020). The Influence of Net Profit Margin, Debt to Equity Ratio, Return on Equity and Earning per Share on the Share Prices of Consumer Goods Industry Companies in Indonesia. International Journal of Advanced Science and Technology, 29(7), 13428–13440.

Tahir, S. H., Sabir, H. M., Alam, T., & Ismail, A. (2013). Impact Of Firm’s Characteristics On Stock Return : A Case Of Non-Financial Listed Companies In Pakistan. Asian Economic and Financial Review, 3(1), 51–61.

Tikasari, N., & Surjandari, D. A. (2020). The Effect of Economic Value Added and Financial Performance on Stock Return. Saudi Journal of Business and Management Studies, 5(6), 343–352. https://doi.org/10.36348/sjbms.2020.v05i06.005

Wardlaw, M. (2020). Measuring Mutual Fund Flow Pressure as Shock to Stock Returns. Journal of Finance, 75(6), 3221–3243. https://doi.org/10.1111/jofi.12962

Youssef, M., Mokni, K., & Ajmi, A. N. (2021). Dynamic connectedness between stock markets in the presence of the COVID-19 pandemic: does economic policy uncertainty matter? Financial Innovation, 7(1), 1–27. https://doi.org/10.1186/s40854-021-00227-3