DOI: 10.5176/2251-1997_AF-91
Authors: Munasinghe M.A.T.K., Fernando J.M.R
Abstract:
This study investigates Merton’s (1987) model of Capital Market Equilibrium with Incomplete Information and the measures of firm size and ownership characteristics are used to test whether those two variables partly explain the cross sectional variation in share price of stock trading in the Colombo Stock Exchange.
The study makes use of a sample of 56 firms covering a four year period from 2006 to 2009. Book value of total assets and average number of trades were used as measures of firm size and the ownership characteristics were measured using average investment per shareholder and average investment per small shareholder. Using all these measures the multiple regression analysis was carried out.
Findings shows that firm size and ownership characteristics are significant in explaining the variation in share prices and however the joint effect explains only forty three percent of variation in share prices. The results of individual effect shows that the firm size is not related to share price in any significant manner and these findings are inconsistent with prior studies relating to developed stock markets. The measure of ownership characteristics shows a significant positive relationship with share prices. And it is consistent with the findings of developed stock markets. Hence the first hypothesis, higher share prices are characteristics of large firms and vice versa are not valid and the second hypothesis, lower share prices are characteristics of firms owned by less wealthy investors vice versa are found to be valid.
Keywords: Share price, Firm size and ownership characteristics.
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