Valuation and Pricing of Equity Securities in an Emerging Stock Market: Evidence from Nigerian Banking Sector

Abstract

In finance, there is widespread agreement that the Capital Asset Pricing Model (CAPM) and Whitbeck-Kisor Model (WKM) are good predictors of share price movements in stock markets. While the above assertion had been empirically validated in several stock markets in developed economies, there have been few such studies in the stock markets of developing economies like Nigeria. Such studies have now become imperative given the recent developments that have seen the Nigerian stock market capitalization increasing from N276, 111,743,197.30 on January 2, 1998 to N10, 180,292,984,225.00 on December 31, 2007 without a relative increase in the volume of stocks being traded. To this effect, the major objective of this study is to examine the relevance of some of the established models that guide stock price movements in the Nigerian context. For this study, particular reference is placed on the banking sector, which dominates other sectors in terms of market capitalization and volume traded in the Nigerian Stock Exchange market. Data for this research were collected mainly from secondary sources such as audited annual reports of sampled banks, periodicals, various publications of Central Bank of Nigeria such as annual reports and statistical bulletins, Daily official lists and statistical year books of Nigerian Stock Exchange, different publications of Securities and Exchange Commission and Nigerian Deposit Insurance Corporation. The data set for the study consists of all the 23 pre-consolidation and 20 out of the 21 post-consolidation bank equity stocks quoted on the Nigerian Stock Exchange. Spring bank was not included because it has not published any financial statements after the bank consolidation exercise. The study covered an eight year period (2000-2007), pre and post bank consolidation periods. Three hypotheses were tested using the Capital Asset Pricing Model (CAPM) and Whitbeck-Kisor Model (WKM), multiple linear regression model, and Pearson product moment correlation coefficient. The findings of the study show that the application of the Capital Asset Pricing Model(CAPM) to Nigerian banking sector data indicate that 100 percent of the banking stocks were either undervalued or overvalued while zero percent were correctly valued. The application of the Whitbeck-Kisor Model (WKM) to Nigerian banking sector data shows that 4.4 percent of the banking stocks were correctly valued while the remaining 95.6 percent were either undervalued or overvalued. Hence none of the tested models guided the valuation and pricing of equity securities in the Nigerian Stock Exchange market from 2000-2007. There was no statistically significant relationship between the price-earnings ratio and the level of earnings growth, dividend payout ratio, and the variability of earnings of the sampled stocks in the Nigerian Stock Exchange market from 2000-2007.