The Efficient Market Hypothesis and the Behaviour of Share Prices in Nepal

Abstract

The results of this study do not support the independence assumption of random walk model. The Nepalese stock market may not be termed as weakly efficient in pricing of shares. The survey of the opinions of Nepalese financial executives indicate that the current market price of shares are useful to make buy or sell decision, to predict future average returns, and to predict future prices. The main factors affecting share prices as perceived by them are dividends, retained earnings, bonus share, and right issues. The share prices have been found more volatile than expected dividends. The study also revealed that Nepalese investors are not indifferent towards makings or non-makings of information public. Among others, the company information, lack of profitability of the company, market operation system and government policy regarding investment are appeared to be the major causes of deficiency in the Nepalese stock market. Information on favourable future prospect of the company would increase market price of share and shareholders in high tax brackets do not prefer retained earnings instead of dividends.