**2. Review of literature**

stock price level. When an investor decides to invest in a stock he always looks for strong and growing companies, the value of the firm is reflected in the stock prices of that firm, and that is how an investor without any finance knowledge selects the stock-by-stock price movements.

22 Firm Value - Theory and Empirical Evidence

One of the key sources of financing for the listed firms is the stock issue, and for successful stock issue, firms need to have a strong track record in the stock market. There are various stakeholders to the business, like shareholders, creditors, customers, employees, and government. The rising stock price is an indicator of good management and satisfaction for all the stakeholders. There are company-specific and market-related determinants of stock prices; in

One of the most significant theories is the Efficient Market Hypothesis (EMH), which is based on the assumption that rational investors in the market react to the available information like company fundamentals and other important declaration about the company to decide on the stock buying or selling. If they feel that the information is positive, then they retain the shares if already bought or buy the one which was not purchased earlier and vice versa. The action of buying and selling stocks by the investors is responsible for changes in stock price. There are three forms of EMH—weak, semi-strong and strong form—and they vary regarding available information for public and investors. Another theory 'Random walk' states that stock prices are random and cannot be predicted by any means. This theory has been empirically tested many times and proved by the researchers. A random walk is consistent with EMH, as the

literature, many theories are available that explain the movement in the stock prices.

flow of information is random which helps investors in reassessing the stock price.

and growth rate of the company are positive determinants of stock prices.

and discount rates and thus have an impact on share prices as well.

The third theory 'Behavioral Finance Theory' is very different from the random walk and the EMH theories. This theory states that investors do not behave rationally rather they invest by psychological and behavioral factors; for example, they will invest in the stock if the stock price is increasing even if there are no significant changes in the company fundamentals.

Gordon [1] revealed that dividend payment and growth rate of the company have an impact on the intrinsic value of shares. The model was based on the assumption of constant growth in dividends which was one of the weaknesses of the model, but still, it is the highly used model to calculate the intrinsic value of the stock. This model claims that expected dividend

A considerable amount of research has been done to find out internal determinants of share price changes of companies, some of the common factors found are dividend yield, total assets, earning per share, capital structure and book value per share. Apart from internal variables, macroeconomic variables also have an impact on share prices that have been discussed by Roll and Ross [2] in his arbitrage pricing theory (APT), a framework for pricing securities for investors. According to Ross, common macroeconomic factors affecting share prices were unexpected changes in inflation, GDP and changes in the yield curve. APT model is flexible as investors can select other factors also depending on the market like for oil exporting and importing countries oil price can be an important factor affecting security prices. Mukherjee and Naka [3] supported the APT theory by confirming the impact of economic variables on the stock returns; they argued that changes in economic variables affect dividend payments Collins [7] was the pioneering work on determinants of share prices based on the US market, the findings of the chapter recognized book value of equity, dividend, net profit and operating cash flows as the significant factors affecting share prices.

Nirmala et al. [8] used fully modified least square regression model on panel data of 37 Indian companies from 2000 to 2009. The study identified price earnings ratio, leverage and dividend per share as the major determinants of share prices. In the Indian context, this study was also conducted by Tandon and Malhotra [9]; they tried to identify determinants of stock prices for 100 companies listed in National Stock Exchange (NSE) using linear regression model from 2007 to 2012. The results indicated that firms' book value, earning per share and price-earnings ratio have a significant positive association with firm's stock price, while dividend yield has a significant inverse association with the market price of the firm's stock.

Malhotra and Prakash [10] studied the determinants of stock prices of Indian companies during 1990–1999 with the help of correlation and regression analysis. Book value per share, dividend per share, market to book ratio and PE ratio emerged as the significant determinants of the share prices.

Oseni [11] studied the impact of earnings per share (EPS), oil price, dividend per share (DPS), GDP, foreign exchange rate and interest rates on share prices of 130 companies from the Nigerian stock exchange. The study revealed a strong positive correlation between stock prices and EPS, oil price, dividend per share and GDP.

Gjerde and Saettem [12] studied the relationship between stock returns and macroeconomic variables like inflation, real economic activity and oil prices in Norway. The empirical study revealed that inflation is not a significant variable for changes in stock prices. However, there was a positive relationship between oil price and stock price.

used to establish the relationship; the study concluded that none of the fundamental factors

Stock Price Determinants: Empirical Evidence from Muscat Securities Market, Oman

http://dx.doi.org/10.5772/intechopen.77343

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Al-Deehani [4] studied the impact of EPS, DPS, previous year dividend, return on equity (ROE), price to book value and cash flow per share on the share prices of companies listed in the Kuwait stock exchange. The study concluded that variables DPS, previous year dividends per share, ROE, price to book value and cash flow per share are all highly correlated with the share price. Al-Tamimi et al. [5] investigated the key determinants of stock prices of 17 companies listed in UAE stock market during 1990–2005. The regression result indicated EPS as a strong determinant having positive impact on share prices; consumer price index was found to be statistically significant with a negative coefficient. Money supply and GDP were found to have a

Allen and Rachim [14] tested the effect of dividend policy on the stock price volatility with the control variables like leverage, growth, earnings volatility and firm size. The data on 173 companies listed in the Australian stock market from 1972 to 1985 were analyzed with the help of cross-sectional regression analysis. The results showed the significant positive relation between stock price volatility and leverage, size and earnings volatility. It was also concluded that dividend policy is not influencing stock price volatility. Apart from the studies mentioned above, few more important studies from different markets are identified and mentioned in **Table 1**.

In the existing literature, there is a mixed opinion on the determinants of stock prices and their positive or negative impact. Very few studies are based on GCC countries and none of them from Muscat securities market, Oman. This study thus fills the gap by researching the impact of select firm-specific and economic variables on the stock prices of the nonfinancial

By available literature and data, the author has identified dividend payout ratio, debt ratio, earnings per share (EPS), logarithm of total assets (a proxy for company size) and price earnings ratio as the regressors of the stock price in this study. This study is based on 26 nonfinancial companies listed in Muscat securities market during 2011–2016. The sample companies selected for the study are based on the availability and fullness of the data. The selected companies are Al Saffa Foods, Salalah Mills, Oman Cement, Raysut Cement, Galfar Engineering and contracting, Anwar Ceramic Tiles, Jazeera Steel Products, National Aluminum Products, Gulf International Chemicals, Oman Chlorine, Oman Cables Industry, Voltamp Energy, Omantel telecommunications, Port Services Corporation, Almaha petroleum products, National Gas, Oman oil marketing, Shell Oman Marketing, ACWA Power Barka, SMN Power Holding, Sohar Power, United Power, Al Jazeira Services, Oman Investment and Finance, Renaissance Services and Ooredoo.

Roll and Ross [2] in his arbitrage pricing theory (APT) has proved the relevance of macroeconomic variables in stock pricing. Based on the literature, economic variables like growth rate in GDP, consumer price index and crude oil prices have also been considered as the external

considered were significant for the changes in the share prices.

positive coefficient, but they were statistically insignificant.

sample companies listed in Muscat securities market, Oman.

**3. Data and variables**

Irfan et al. [13] attempted to explain the impact of six company variables dividend yield, dividend payout ratio, leverage, size of the firm, earnings volatility and asset growth rate on stock prices of Pakistani companies during the period 1981–2000. A regression model was


**Table 1.** Summary of other identified studies.

used to establish the relationship; the study concluded that none of the fundamental factors considered were significant for the changes in the share prices.

Al-Deehani [4] studied the impact of EPS, DPS, previous year dividend, return on equity (ROE), price to book value and cash flow per share on the share prices of companies listed in the Kuwait stock exchange. The study concluded that variables DPS, previous year dividends per share, ROE, price to book value and cash flow per share are all highly correlated with the share price.

Al-Tamimi et al. [5] investigated the key determinants of stock prices of 17 companies listed in UAE stock market during 1990–2005. The regression result indicated EPS as a strong determinant having positive impact on share prices; consumer price index was found to be statistically significant with a negative coefficient. Money supply and GDP were found to have a positive coefficient, but they were statistically insignificant.

Allen and Rachim [14] tested the effect of dividend policy on the stock price volatility with the control variables like leverage, growth, earnings volatility and firm size. The data on 173 companies listed in the Australian stock market from 1972 to 1985 were analyzed with the help of cross-sectional regression analysis. The results showed the significant positive relation between stock price volatility and leverage, size and earnings volatility. It was also concluded that dividend policy is not influencing stock price volatility. Apart from the studies mentioned above, few more important studies from different markets are identified and mentioned in **Table 1**.

In the existing literature, there is a mixed opinion on the determinants of stock prices and their positive or negative impact. Very few studies are based on GCC countries and none of them from Muscat securities market, Oman. This study thus fills the gap by researching the impact of select firm-specific and economic variables on the stock prices of the nonfinancial sample companies listed in Muscat securities market, Oman.
