An Evaluation as to the Relationship of Corporate Returns from Stock Prices - Research Proposal Example

 MSc PROGRAMME PROJECT PROPOSAL An Evaluation as To the Relationship of Corporate Returns from Stock Prices 1. Background and Context 1.1 Outline the context of the proposed research The context of the propose research assumes that businessmen and investors make decisions each day. They normally look at the financial statement of the corporations to see the profitability of the same make investment decision. They do however has may many choices. This thesis of the paper will be to defend The Proposition The Higher Profitability Means Higher Stock Prices. 1.2 Outline the motivation of your study The study is motivated by interesting reality that not all corporations are earning and yet these corporations have stockholders and investors who are bought still by the investors. It is said that finance theory makes valuation of stocks in terms of discounted estimated cash flows. Although profitability increase the net worth of corporations certain accounting conventions computes income not purely on cash basis but also on accrual basis. The result of this study will at least provide an answer to the interesting events in the life of a corporation. 1.3 Why is it important? The significance of knowing the relationship of the corporate returns as may be expressed in ratios would lend a hand to decision makers in adopting major decision of buying or selling a stock. On the part of the seller, he would know when he decide to sell his holding of stock while on the part of the buyer estimates when to buy stocks in the market. In business, timing is important for at certain points in time decisions must be made. A corporation has life and many events could happen that could affect the stockholders and the corporation in terms of stock as far as the general public is concerned. Knowledge of the principles when to sell and when to buy stocks in the stock market or any thing like the selling the whole in many fields of business is what keeps an intelligent entrepreneurs from the rest. It is that they call in business separate the best from the average. Economies all over the world are flooded with much information but corporate executives processes only relevant information for certain types of business decisions. For purposes of investments decisions, are there really things which much be taken into consideration. The writer of this dissertation believes it can at least help decision makers by properly defining some relevant things or variables for consideration. There is also such a thing a decisions based on gut feel where decisions seemed to be inspired by outside sources and some businessmen are really the same instead of the scientific way that is on the basis of evidence. This piece of aims to applying science as an alternative to the use of gut feel. This may therefore be valuable for those who will find the reality of the situation that human is rational beings and rational beings use commons sense and logic. Logical thinking assumes the use reason based on fact and a mind that it mentally convinced has with it’s the characteristic of knowing the ‘business truth’ which lie in understanding the relationship of variables. 1.4 Who would be interested? The people who are interested are the investors and the stockholders of the corporations. Investors normally rely on financial statements of corporations. They have the seeming belief that a profitable business must have its stocks priced higher than non profitable ones. This is of course the thesis of this paper before the evidence. We will therefore try to confirm using data from selected corporations belonging to the S&P 500. Stockholders have that inherent dream of becoming wealthier with their investment. They do course want to have more wealth. Their knowledge therefore of the result of this paper would be a big welcome to some of the questions such: “How will corporations increase further their wealth?” 1.5 Why there is need for such research? The need for such research is validated by the fact that it will try to prove whether there is truth to what was the theory years ago and whether it still apply to the present periods. Everything in life changes, even processes and theories. Empirical validation may be needed whether there is a need to continue believing theories or there is now a need to modify in certain areas of business at certain points in time 1.6 Is there a gap between academic literature and practice? That there is a gap between academic literature and practice is a presumption for purposes of any research since theories may be based on past experiences under certain conditions which may have already changed as a result of new technologies and other changes in the business environment. 2. Research Questions 2.1 What are the specific issues that your research will be addressing? The paper will answer issues that will tell the relationships of variable as defined, but more specifically it will answer the two questions: Are corporate returns directly related with stock prices? Will the answer to the question help also help companies in trying to attain target prices of their stocks? The relationship of corporate earnings (future and past) to stock price is one interesting questions which challenges many. It is thus worth it to find whether a difference between the two really exist? Are they not the equivalent? Defining the terms could make things clearer. We define corporate earnings as corporate returns, which may expected and real. Expected corporate earnings pertain to future or expected rates of return in the future while real earnings refers to past or historical returns expressed in terms of return on equity. We define stock returns as referring to stock valuation which is expressed by price -earnings ratio or market price of a stock. It should be stated early that future corporate earnings may need not become real earnings but they may. Real earnings therefore, are the actual results of a corporation’s performance. This must be so, since a stockholder, being an investor, values the information of whether his wealth will really be increased by investing his money in the corporation while he has many options of putting his money or will he stay in holding his shares of stock in the corporation. Before an entrepreneur puts his money or property he asks him self how much will the person. Will he earns more by investing his money in stocks or will he earn more investing his money in bonds or other investments? After investing, his never ending question is: How will preserve the earnings? It must be made clear that is not absurd for a stockholder to desire to maximize his wealth by increasing profits by increased stock valuation. In stock valuation, persons are also interested in time value of money. Hence they are concerned with the discounted cash flows as a way of measuring valuation of their investments. It could be aid given many alternative investment opportunities; an investor would choose the one with the highest net present value, a good approximation of the market value. By understanding therefore the relationship of the variables as defined earlier, the researcher hopes that decision makers, particularly stockholders would be properly guided. Finding the relationship among the variables, the decision maker would be better equipped than that of someone who is not informed or ‘gut-feel’ decision maker. It is said that been a gambler and a businessman are not the same; the latter takes advantage of principles of good decision making like the uses of models come up with an analysis of a given data or information and wisely arrive at a well-informed or well-advised decision. 2.2 What issues you aim to resolve or provide additional insights? The issues that aim to resolve include looking at how stock prices get high if ever financial performances of corporations are enhance. Is the relationship automatic? 3. Literature Review This paper will use several at least five research paper from different sources that could be Found in Internet. Existing literature narrates the effects to skyrocketing and diving prices in the stock exchanges around the world would have consequences in the economy (Samuelson and Nordhaus, 1992). Seeing what really what happen when prices go up or down in the stock market is a wonderful activity and which this paper will try to discover. Whatever ever happens in the stock market it is always a game of winners and losers. Low prices may be bad for some but is profitably attractive for to others. This is a fact if taken from the other side that is in case prices are up. The law of supply and demand governs the market including issues like completeness or incompleteness of information really takes their roles in the game. From the point of view of business men, situations like are viewed as financial or economic realities which move them to act in their best interest. There is the reason that normally no or few existing stockholders would want to be surprised that the next day or week the prices of their stockholdings drop by more than one half the original price. Investors which include stockholders do make investment decisions by applying financial management principles and concepts. Studying the relationship between corporate earnings (expected and real earnings) to stock returns is closely related to financial management. (Brigham and Houston, 2002) Financial management decisions come from accounting information. It is a fact that accounting information (Meigs and Meigs, 1995) is not just end in them. Being the “the language of business” it merely helps the decision makers in business. Accounting information is governed by generally accounting principles and their preparation is presumed reliable. Specially if they are audited by a certified public accountant (Whittington and Pany, 1995) As we can see us above, maximization of wealth is the goal of every stockholder and the present value of the assets they holding are important to them. In this study there is therefore a need to understand the concept and formula of discounted cash flows. Will the finance manager or the investor need to consider the financial performance in estimating the value of the stocks? Would he rather look at the financial performance as just some irrelevant since no body really sees the future and therefore just a question of gut feel? Objectives of study The exact objective of the study whether investors could rely on the financial ratios of the corporation in predicting the stock prices for which they could invest. The expected result of the study will either say the there is direct relationship, an indirect relationship or no relationship at all. These results could from processing the data that would be provided The possible interpretation could be as follows: Presence of direct relationship puts investors to consider the financial performance results if they anticipate having higher stock prices. The reverse explanation would ensue if the corporations do not show profitability. Absence of relationship should make investors to use more their resources in finding the more significant variables that could influence the stock prices. 4. Methodology 4.1 What data is required? The data required include the stock prices, price earnings rations and return on investments of at least ten corporations from S&P 500 (Standard and Poor’s, 2007) for the fast few years from websites of the said corporations or any reliable sources (Yahoo Finance, 2007). 4.2 Over what time period? Utmost effort will be exerted use date with the last 5 to 10 year periods 4.3 Sources of such data Data could come from the Website of the companies, from Yahoo Finance and as we’ll the stock exchanges and the Securities and Exchange Commission of the US. All of the data will come from published sources if possible through the use of the Internet. A significant amount of effort was done in searching to find all relevant information to the issue of interest and they are arranged and analyzed in the best way that could be best understood by the reader. The writer of this dissertation used all the available information that could be sourced from the internet at a given point in time 4.4 Methods of data analysis Method of analysis could include regression analysis, survey analysis, and qualitative analysis via content analysis from the statement from relevant sources 5. References Standard and Poor’s (2007) S&P 500 top ten corporations {www document} URL http://www2.standardandpoors.com/spf/pdf/index/500factsheet.pdf , Accessed March 31,2007 Brigham and Houston,2002, Fundamentals of Financial Management, Thomson South Western, London, UK Meigs and Meigs (1995) Financial Accounting, Mc-GrawHill, London, UK Samuelson and Nordhaus,1992 , Economics, Mc-GrawHill, London, UK Whittington and Pany (1995) Principles of Auditing, IRWIN, London,UK Yahoo Finance.com (2007) S&P Index Charts, {www document} URL, http://finance.yahoo.com/charts#chart1:symbol=^gspc;range=my;indicator=volume;charttype=line;crosshair=on;logscale=on;source=undefined, Accessed March 31,2007 Read More