Stock Market Behavior in a Small Capital Market: A Case of Nepal

Abstract

The purpose of this paper is to address the stock market behaviour in a small capital market in the context of Nepal. It attempts to examine relationship of market equity, market value to book value, price-earning, and dividends with liquidity, leverage, profitability, assets turnover, and interest coverages. The results indicate that larger stocks have larger price-earning ratios, larger ratio of market value to book value of equity, lower liquidity, lower profitability, and smaller dividends. Price-earning ratios and dividend ratios are more variable for smaller stocks whereas market value to book value of equity is more variable for larger stocks. Larger stocks also have higher leverage, lower assets turnover, and lower interest coverages but these are more variable for smaller stocks than for larger stocks. Stocks with larger market value to book value of equity have larger price-earning rations, and lower dividends. These stocks also have lower liquidity, higher leverage, lower earnings, lower turnover, and lower interest coverages.Stocks with higher price-earning ratios have lower liquidity, higher leverage, lower profitability, lower turnover, and lower interest coverages. However, these are all more variable for stocks with smaller price-earning ratios than for stocks with larger price-earning ratios.Stocks paying higher dividends have higher liquidity, lower leverage, higher earnings, higher turnover, and higher interest coverages. However, liquidity and leverage ratios are more variable for the stocks paying lower dividends while earnings, assets turnover, and interest coverages are more variable for the stocks paying higher dividends.