Influence of Financial Ratios on Investment Decisions of Common Stock : Current School News

Influence of Financial Ratios on Investment Decisions of Common Stockholders in Quoted Manufacturing Companies in North-West Nigeria

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Influence of Financial Ratios on Investment Decisions of Common Stockholders in Quoted Manufacturing Companies in North-West Nigeria.

ABSTRACT

This research work is aimed at determining the influence of financial ratios on investment decisions of common stockholders in quoted manufacturing companies in North-West Nigeria.

Seven research questions were raised for the study which include; to what extent does Price-earnings ratio influence investment decisions of common stockholders in quoted manufacturing companies in North-West Nigeria?

Seven null hypotheses were tested for the study which include; there is no significant difference between the mean responses of common stockholders and accountants on the influence of financial ratio on investment decisions of common stockholders in quoted manufacturing companies in North-West Nigeria.

Descriptive survey design was adopted for this study. The population for the study consisted of 230,898 respondents, made up of 230,638 common stockholders registered with 33 accredited stockbrokerage firms in North-West Nigeria and 260 accountants from 84 quoted manufacturing companies.

The proportionate, stratified and purposive sampling techniques were employed to select a sample size of 465 respondents made up of 95 accountants in manufacturing companies and 370 common stockholders registered with accredited stockbrokerage firms in manufacturing companies in North- West Nigeria.

Influence of Financial Ratios on Investment Decisions Questionnaire (IFRIDQ) was used for data collection. The questionnaire was face validated by five experts; three from the Department of Vocational Teacher Education, University of Nigeria Nsukka, two from Department of Business Education, Ahmadu Bello University, Zaria.

The instrument was trial tested with 30 respondents from North-Central Nigeria. To ascertain the internal consistency of the items of the questionnaire Cronbach Alpha Reliability Coefficient of 0.890 was  obtained for the study.

The instrument was administered through personal contact with the help of twenty research assistants. Out of the 465 copies of questionnaire administered, 422 copies were retrieved and used for the study.

The data collected were analyzed using mean to answer the seven research  questions while t-test analysis was employed in testing the seven null hypotheses at 0.05 level of significance.

The findings obtained include that: Registered common stockholders with accredited stockbrokerage firms in manufacturing companies in, North-West Nigeria are influenced by Price-Earning (P/E) ratio on their investment decisions to a great extent.

Registered common stockholders with accredited stockbrokerage firms in manufacturing companies, North-West Nigeria are influenced by dividend per share ratio on their investment decisions to a great extent and that some common stockholders in manufacturing companies are influenced by dividend per share ratio on their investment decisions to a moderate extent.

It was, therefore, recommended that Business Educators, especially accounting educators should be innovative in their instruction by equipping students with the relevant skills and knowledge about the use of ratios to evaluate and chose the right company to invest in or to withdraw their investment at the right time in order to minimize losses of their investment.

TABLE OF CONTENTS

Title Page i
Approval Page ii
Certification iii
Dedication iv
Acknowledgements v
Table of Contents vi
List of Figures ix
List of Tables x
Abstract xii

CHAPTER ONE: INTRODUCTION 1

Background of the Study 1
Statement of the Problem 12
Purpose of the Study 14
Significance of the Study 15
Research Questions 17
Hypotheses 18
Delimitation of the Study 19

CHAPTER TWO: REVIEW OF RELATED LITERATURE 20

Conceptual Framework 20
Financial Ratios 26
Common Stock 59
Quoted Manufacturing Companies 77
Concept of Influence 83
Concept of Investment 86
Theoretical Framework 99
Theory of Technical Analysis 99
Theory of Fundamental Analysis 100
Related Empirical Studies 102
Summary of Literature Reviewed 113

CHAPTER THREE: METHODOLOGY 116

Design of the Study 116
Area of the Study 116
Population for the Study 116
Sample and Sampling Technique 117
Instrument for Data Collection 118
Validation of the Instrument 119
Reliability of the Instrument 119
Method of Data Collection 120
Method of Data Analysis 120

CHAPTER FOUR: PRESENTATION AND ANALYSIS OF DATA 121

Analysis of Data 121
Major Findings of the Study 141
Discussion of Findings 145

CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATIONS 156

Re-Statement of the Problem 156
Summary of the Procedures Used 157
Summary of Findings 158
Implications of the Study 160
Conclusion 161
Recommendations 162
Limitations of the Study 163
Suggestions for Further Studies 163
REFERENCES 164
APPENDICES 177

INTRODUCTION

The uncertainty associated with returns from common stock makes the valuation of common stock more difficult, this is owing to the variability of the returns. The expected returns in form of dividends and capital gain (or losses) are the major variable employed in common stock valuation (Pushpa, 2011).

According to Roll (2006), common stocks or ordinary shares represent the ultimate ownership position in a company. Common stockholders or shareholders are the residual owners of the company, as they provide permanent capital to the company.

By purchasing the common stocks of a company, stockholders are entitled to dividend, which is inconsistent. Stockholders are entitled to dividends after the income claims of other stakeholders have been satisfied. They are the last to have their claims on assets when the company is winding-up.

Even though stockholders provide the permanent capital to the company, they can only recover their investments before the liquidation or winding up of the company by selling their shares in the secondary market.

According to Hampton (2008), there are two major categories of common stockholders which are: holders of value and investors in stock.

The holders of value are stockholders who buy and take custody of their shares while the investors in shares are stockholders who buy and open brokerage account with stockbrokerage firms.

This thesis focused on investors in common stock that opened brokerage account with stockbrokerage firms, and they are the only stockholders that can be reached.

REFERENCES

Abraham, A. and David, I. (2011). The Individual Investor and the Weekend Effect. Journal of Financial and Quantitative Analysis, 15 (2), 126-170.

Ackert, L. and Deaves, R. (2010). Behavioral Finance. South-Western Cengage Inc. London. 231-267.

Adelegan, O.J. (2000). The Relationship between cash flows and Dividend Changes. A paper presented at the 23rd Annual Congress of European Accounting Association. Munci, Germany, 5-9.

Abdokreza, G. (2013). Relationship between Operational Financial Ratios and Firm’s Abnormal Stock Returns. Research Journal of Applied Sciences, Engineering and Technology, 6 (15), 230-241.

Agbonifoh, B.A. and Yomere G.O. (1999). Research Methodology in the Social Sciences and Education. Uniben Press, Nigeria. 348-451.

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