This document examines the relationship between firms' specific variables and stock returns in the Nepalese stock market. It aims to evaluate the effect of size, earnings yield, cash flow yield, book-to-market equity, and leverage on returns of financial institutions listed on the Nepalese Stock Exchange. The study finds negative relationships between returns and book-to-market equity ratio as well as cash flow yield. Returns are positively related to size and market risk factors. Leverage, as measured by market leverage ratio, has a strong negative impact on returns. The study concludes that investment in large firms and firms with low book-to-market ratios tend to be more profitable in Nepal.

1. Firms’ Specific Variables and
Stock Returns in Nepal
Niyam Raj Shrestha
Exam Roll No.: 185/010
TU Regd. No.: 24518/87
M. Phil in Management
Tribhuvan University
Presentation on

2. Background
• Different factors affect the stock returns
of the common stock
• Average returns on stock of small firms
were higher than the average returns on
stocks of large firms(Banz,1981).
• Relevant to examine the existence of
firms specific Variables in the Nepalese
stock market
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3. Issues
• What are the relations between firms’ specific
variables and security returns for the firms in the
Nepalese context?
• Is there any consistency in explanatory power of
these variables and security returns when
considered individually and when considered
together?
• How the shareholders of security market perceive
preference towards the stock market efficiency
and factors affecting stock returns in Nepal?
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4. OBJECTIVES OF STUDY
• To evaluate the effect of firms’ specific variables on stock
returns in Nepalese stock market
– To analyze effect of size, earning yield, cash flow yield, book-to-market
equity and leverage on stock returns of financial institutions.
– To assess the relationship between the firm size, earning yield, cash
flow yield, book-to-market equity, leverage and security returns for
financial institutions.
– To evaluate whether the CAPM has the explanatory power in
explaining cross-section of stock returns in Nepal.
– To determine which firm specific fundamental variable(s) have
significant the explanatory power for stock returns.
– To investigate the stakeholders’ efficiency towards security market
perceive preference towards the stock market efficiency and factors
affecting stock returns in Nepal.
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5. METHODOLOGY
• Descriptive research design
– Extreme size Percentiles portfolios as the small firms
(size percentile 1) and big firms (size percentile 5)
• Causal comparative research design-As Fama and French
1992
»MODEL
 Rit = α + b1t LMEit + b2t BE/MEit + b3t E/pit + b4t C/Pit +
+ b5t LEVit + et ..........................................................( i )
 Rit – RFt = i + bi [RMt – RFt] + eit ...........................( ii )
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6. METHODOLOGY contd…
Variables
• Stock return (Rit)
• Market return (RMt)
• Risk-free rate (RFt)
• Firm size (LME)
• Book-to-market equity (BE/ME)
• Earnings-to-price ratio (E/P)
• Cash flow yield to price ratio (C/P)
• Leverage ratio (A/ME and A/BE)
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7. SAMPLE
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Distribution of Population and Sample
Listed Companies N
Sample No. of
Observationn %
Commercial Banks 27 22 81.48 188
Development Banks 76 41 53.95 138
Finance Companies 73 59 80.82 320
Total 176 122 69.32 646
Source: NEPSE and data from SEBON
Total 122 sample firms for 646 observations for the period of 1999 and 2012

8. Major Findings
• Portfolios Sorted by Size
– Returns are in increasing trend
– As size increases, the return also increases
• Portfolios Sorted by Book-to-Market Ratio (BE/ME)
– Inverse relation between stock returns and book-
to-market equity ratio.
– Increased in firms portfolio formed by book-to-
market ratio the returns have decreased.
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9. Major Findings
• Portfolios Sorted by Earning to Price Ratio (E/P)
– Returns are in decreasing trend
– Lower E/P performed higher stock return
• Portfolios Sorted by Cash Flow Yield Ratio (C/P)
– Inverse relation between stock returns and cash flow
yield ratio.
– Firms return is in decreasing in trend.
– Increased in firms portfolio percentile formed by cash
flow yield ratio the return have decreased.
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10. Major Findings
• Portfolios Sorted by Market Leverage Ratio (A/ME)
– Inverse Relation with stock return
– Lower A/ME performed higher stock return
• Portfolios Sorted by Book Leverage Ratio (A/BE)
– Not strongly associated with stock return
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11. Major Finding…contd…
– Stock return and book-to-market equity ratio has negative
relation and book-to-market ratio is the most important
variable to explain the impact on stock return
– The returns and size of the firm has a positive relation
– When combine all the variables except BE/ME, are
significant and these variables are strong enough to explain
the impact on stock returns
– Market leverage ratio has strong negative impact on stock
returns
– E/P ratio is important variable to explain impact on stock
return
– Stock returns are significantly positively related with market
risk factor
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12. Major Finding…contd… (Primary Data)
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– Majority of the respondents do not analyze the
risk while investing on the securities.
– Right share of the company as a most affecting
factor for the determination of share price of the
companies
– The majority of the respondents buy shares
when the stock price decreases and sells when it
increases
– End of the fiscal year effect on share price is the
major seasonal effect in Nepali stock market

13. Concluding Remarks
• Investment in stocks of large firms is profitable
• The leverage variables (A/ME and A/BE ratios)
have strong impact on stock returns.
• Stocks with low BE/ME ratio are attractive in
Nepalese stock market
– Firms which maintain low BE/ME ratio provide
higher returns
• Investors prefer to adopt an active strategy in
common stock investment.
• Large numbers of macroeconomic variables
which affect stock returns are recommended for
the further study
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14. THANK YOU
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