Determinants of stock return of listed manufacturing companies in Nepal

Abstract

The study investigates the determinants of stock return for listed manufacturing companies in Nepal. The foundational principle posits that the anticipated return on equity should increase with the debt embedded within a firm's capital structure in a market with friction. Surprisingly, analyses of manufacturing companies and their stock returns in Nepal remain noticeably absent. The objectives of this study are to explore the factors affecting stock return, analyze the relationship among Return on Assets (ROA), Debt-to-Equity Ratio (D/E), Dividend Payout Ratio (DPR), and Earnings Per Share (EPS) with stock return and examine their impact on the stock return of Nepalese manufacturing companies. The research employed a descriptive and causal-comparative design, utilizing secondary data from NEPSE and financial reports of listed companies from 2016/17 to 2020/21. The sample included data from Unilever Nepal Limited, Himalayan Distillery Company, Bottlers Nepal Limited, and Bottlers Nepal Terai Limited, totalling 20 observations. The major findings reveal that Market Capitalization significantly influences stock returns, with a strong positive correlation. ROA shows a weak positive correlation with stock returns, while the D/E ratio exhibits a moderate positive correlation, indicating that higher leverage correlates with higher stock returns. DPR and EPS demonstrate weaker correlations, with DPR having no significant impact and EPS showing a slight negative association. Regression analysis confirms that ROA and D/E ratio are significant predictors of stock returns. In conclusion, the study provides valuable insights into the financial determinants of stock returns for manufacturing companies in Nepal. Market Capitalization and leverage play significant roles in stock performance, while dividend policies and earnings per share have limited impact. These findings offer actionable insights for investors, analysts, and policymakers in optimizing investment strategies and understanding stock market dynamics in Nepal's manufacturing sector.