The Influence of Microeconomic Variables on Stock Prices of Companies Listed on Ghana Stock Exchange

Abstract

This study examines the long-run equilibrium relationship and the direction of causality between stock prices at Ghana Stock Exchange (GSE) and a set of five stock market oriented factors technically can be defined as microeconomic variables. The study employs time series data comprising of the stock prices of listed companies for the period spanning from April 1998 to April, 2013 and key microeconomic variables, benchmarks of corporate performance, obtained from the annual financial statements of selected listed companies covering the time period December 1997 to December 2013. Unit root test was performed using Augmented Dickey-Fuller (ADF) and Kwiatkowski Phillips Schant and Shin (KPSS) test. Johansen and Juselius (1990) Cointegration test was used to establish long – run relationship between stock price and microeconomic variables. In order to determine the existence of causality, Granger Causality test proposed by Toda and Yamamoto (1995) was employed to investigate the long-run equilibrium relationship as well as causal relationships between the GSE all-share price index (GSI) and the five microeconomic variables (i.e. Earnings per share. Dividend per share, Return on equity, Net asset per share and Debt to equity ratio). The study revealed that Divided Per Share (DPS) has a bidirectional causal relation with Stock Price (SP). This position is confirmed by Bhattacharrya (1979) in literature. The results also revealed that there is a unidirectional causal relation running from Stock Price to NAPS, which is consistent with the Efficient Market Hypothesis (EMH). The Vector Error Correction Model (VECM) estimated the short – run relationship between the selected microeconomic variable and stock price of companies listed on GSE,. The estimated coefficient of ECM(-1) is (-0.3455) at 5% significant level which concluded that, in the absence of changes within the dependent variable, the deviation of the model in the long – run equilibrium is 35% corrected in each year.