LONDON SCHOOL OF BUSINESS AND FINANCE

Title of Dissertation
Development of Capital Market and Behaviour of Stock Price in Nepal
(A case study from 2006/07 to 2010/11)

Author
Raj Kumar Maharjan, A 4016920

Supervisor
Sunita Kotta

Academic Year
[2011-2012]

Submitted in support of: MSc. Finance

 Development of Capital Market and Behaviour of Stock Price in Nepal
(A case study from 2006/07 to 2010/11)

Table of Contents
Explanatory Notes................................................................................................................................vi
Acknowledgement................................................................................................................................vii
Abstract...............................................................................................................................................viii
Chapter 1: Introduction.........................................................................................................................1
1.1 Background..................................................................................................................................1
1.2 Financial Market..........................................................................................................................1
1.2.1 Money Market..........................................................................................................................2
1.2.2 Capital Market.........................................................................................................................2
1.3 Capital Market Instruments.........................................................................................................3
1.4 Types of Capital Market...............................................................................................................3
1.4.1 Primary Market.......................................................................................................................3
1.4.2 Secondary Market....................................................................................................................3
1.4.3 Importance of Secondary Market............................................................................................3
1.5 Purpose and Scope.......................................................................................................................4
1.6 Research Aims..............................................................................................................................5
1.7 Research Questions......................................................................................................................5
1.8 Research Hypothesis....................................................................................................................5
1.9 Research Objectives.....................................................................................................................6
1.10 Design of the Research............................................................................................................6
1.10.1 Introduction........................................................................................................................6
1.10.2 Literature Review...............................................................................................................6
1.10.3 Methodology.......................................................................................................................6
1.10.4 Findings/Results.................................................................................................................7
1.10.5 Analysis/ Discussion of Findings........................................................................................7
1.10.6 Conclusions/ Recommendations.........................................................................................7
Chapter 2: Literature Review................................................................................................................8
2.1 Capital Market.............................................................................................................................8
2.1.1 Capital Market Development Indicator...................................................................................9
2.2 Theories of Stock Price Behaviour.............................................................................................12
2.2.1 Market Efficiency...................................................................................................................12
2.2.2 Efficient Market Hypothesis..................................................................................................13
2.2.2.1 Weak Efficiency................................................................................................................13
2.2.2.2 Semi Strong Efficiency......................................................................................................13
2.2.2.3 Strong Efficiency...............................................................................................................13
2.2.3 Random Walk Theory............................................................................................................14
2.2.4 Technical Trading Approach.................................................................................................14
2.2.5 Fundamental Trading Approach...........................................................................................15
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 Development of Capital Market and Behaviour of Stock Price in Nepal
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2.3 Capital Market: Global Perspective..........................................................................................15
2.4 Capital Market: Asia..................................................................................................................18
2.5 Development of Capital Market in Nepal..................................................................................19
2.5.1 Current Structure of Capital Market in Nepal......................................................................20
2.6 Research Gap.............................................................................................................................21
Chapter 3: Methodology......................................................................................................................22
3.1 Introduction................................................................................................................................22
3.2 Research Design.........................................................................................................................22
3.3 Population and Sample Size.......................................................................................................22
3.4 Source of Data...............................................................................................................................23
3.5 Data Collection Methods...........................................................................................................23
3.5.1 Primary data:........................................................................................................................23
3.5.2 Secondary Data:....................................................................................................................24
3.6 Methods used to achieve Hypothesis..........................................................................................24
3.6.1 Karl Pearson’s Coefficient co-relation.................................................................................24
3.6.2 t-test: Paired Two Sample for Means where  is unknown...................................................25
3.6.3 Run test analysis....................................................................................................................26
3.6.4 Methods used to achieve objectives.......................................................................................27
3.6.4.1 Ratio Analysis...................................................................................................................27
3.6.4.2 Growth Analysis...............................................................................................................28
3.6.5 Descriptive Statistics.............................................................................................................28
3.6.6 Factor effecting NEPSE index...............................................................................................28
3.6.7 Predictability of Share price.................................................................................................28
3.7 Validity and Reliability...............................................................................................................29
Chapter 4: Findings and Result...........................................................................................................30
4.1 Findings of Primary Data..........................................................................................................30
4.1.1 Respondent’s Demographic Information..............................................................................30
4.1.2 Respondents Knowledge on Capital Market.........................................................................31
4.1.3 Respondent Knowledge of Investment and Stability..............................................................34
4.1.4 Respondent Knowledge on Impact of Signalling Factor.......................................................37
4.2 Findings of Open Ended Questionnaire.....................................................................................39
4.3 Findings of Secondary Data.......................................................................................................40
4.3.1 Hypothesis 1..........................................................................................................................40
4.3.1.1 Karl Pearson’s Coefficient co-relation............................................................................40
4.3.2 Objective 1.............................................................................................................................40
4.3.2.1 Ratio Analysis...................................................................................................................40
4.3.2.3 Growth Analysis...............................................................................................................41
4.3.3 Objective 2.............................................................................................................................44
4.3.3.1 Risky Sector......................................................................................................................44
4.3.4 Hypothesis 2..........................................................................................................................45
4.3.4.1 Signalling Factor..............................................................................................................45

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 Development of Capital Market and Behaviour of Stock Price in Nepal
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4.3.5 Hypothesis 3..........................................................................................................................46
4.3.5.1 Run Test............................................................................................................................46
4.3.6 Objective 3 and 4...................................................................................................................46
4.3.5.1.1 Daily Price Run Test.............................................................................................................47
4.3.5.1.2 Monthly Price Run Test........................................................................................................48
Chapter 5: Analysis/ Discussion of Findings......................................................................................49
5.1 Development and present situation................................................................................................49
5.2 Risky Sector................................................................................................................................50
5.3 Signalling Factor........................................................................................................................51
5.4 Market Efficiency.......................................................................................................................53
5.5 Analysis of Open Ended Questionnaire.................................................................................54
Chapter 6: Conclusion/ Recommendations.........................................................................................55
6.1 Conclusion..................................................................................................................................55
6.2 Recommendations.......................................................................................................................57
6.3 Limitation of the Study...............................................................................................................59
Appendices...........................................................................................................................................60
References............................................................................................................................................83

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 Development of Capital Market and Behaviour of Stock Price in Nepal
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List of Figure

FIGURE 1: MAJOR HOLDERS OF U.S. EQUITIES.............................................................................................16

FIGURE 2: MARKET CAPITALIZATION OF LISTED COMPANIES (%GDP).......................................................17
FIGURE 3: MARKET CAPITALIZATION OF LISTED COMPANIES IN SAARC REGION......................................17
FIGURE 4: ASIA (EX JAPAN) EQUITY CAPITAL MARKET VOLUME...............................................................18
FIGURE 5: CAPITALIZATION OF NEPALESE CAPITAL MARKET......................................................................20
FIGURE 6: ANALYSIS OF SECTOR WISE SENSITIVITY INDEX..........................................................................44

List of Box

BOX 1: THE HIMALAYAN TIMES....................................................................................................................51

BOX 2: THE KATHMANDU POST....................................................................................................................52
BOX 3: THE REPUBLICA................................................................................................................................53

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 Development of Capital Market and Behaviour of Stock Price in Nepal
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List of Table

TABLE 1: SECTOR WISE COMPANY, POPULATION & SAMPLE SIZE AND STUDY YEAR.................................22
TABLE 2: SAMPLE COMPANIES, NEPSE TRACKER, SECTOR AND CRITERIA OF SELECTION.........................23
TABLE 3: DEMOGRAPHIC ANALYSIS..............................................................................................................30
TABLE 4: AGE OF RESPONDENT.....................................................................................................................30
TABLE 5: KNOWN ABOUT CAPITAL MARKET................................................................................................31
TABLE 6: CAPITAL MARKET HELPS TO INVEST IN SECURITY LIKED.............................................................31
TABLE 7: DEVELOPMENT OF CAPITAL MARKET IN NEPAL...........................................................................31
TABLE 8: MAJOR PROBLEMS OF CAPITAL MARKET......................................................................................32
TABLE 9: TYPES OF MARKET INVESTED........................................................................................................32
TABLE 10: TYPES OF SECURITY INVESTED....................................................................................................33
TABLE 11: OBJECTIVES FOR INVESTMENT AND ACHIEVEMENT OF OBJECTIVES...........................................33
TABLE 12: TYPES OF SECURITY TO INVEST IN FUTURE.................................................................................34
TABLE 13: EVALUATION OF INVESTMENT IN STOCK MARKET......................................................................34
TABLE 14: SECURE SECTOR IN TERM OF RETURNS AND PRICE STABILITY..................................................35
TABLE 15: FACTORS NEEDED TO CONSIDERED WHILE MAKING INVESTMENT DECISION..............................35
TABLE 16: REACTION TOWARDS NEWS OF GOVERNMENT AGENCIES TO INVEST IN CAPITAL MARKET.......36
TABLE 17: CDS WILL IMPROVE CAPITAL MARKET ACTIVITY AND BOOST INVESTOR’S CONFIDENCE........36
TABLE 18: MARKET MAKER HAS HELPED TO STABILIZE THE SHARE PRICE..................................................37
TABLE 19: STABILITY TO NEPALESE CAPITAL MARKET-BY-MARKET MAKERS...........................................37
TABLE 20: FACTORS FOR THE NEPSE INDEX DRIFT.....................................................................................37
TABLE 21: FACTOR THAT WILL AWAKE SHARE PRICE..................................................................................38
TABLE 22: SHARE PRICE PLUNGED MORE SHARPLY......................................................................................38
TABLE 23: KARL PEARSON’S COEFFICIENT CO-RELATION............................................................................40
TABLE 24: MARKET SIZE AND LIQUIDITY.....................................................................................................41
TABLE 25: PUBLIC ISSUE AND AMOUNT........................................................................................................41
TABLE 26: NUMBER OF LISTED AND TRADED SECURITIES...........................................................................42
TABLE 27: NUMBER OF TRANSACTION AND ANNUAL TURNOVER................................................................42
TABLE 28: PAID UP VALUE AND MARKET CAPITALIZATION.........................................................................43
TABLE 29: SECURITY BUSINESSPERSON........................................................................................................43
TABLE 30: ANALYSIS OF SECTOR WISE SENSITIVITY INDEX.........................................................................44
TABLE 31: RESULT OF SIGNALLING FACTOR.................................................................................................45
TABLE 32: DAILY PRICE RUN TEST (01/01/2012 – 13/09/2012)...................................................................47
TABLE 33: MONTHLY PRICE RUN TEST (JUN/JUL 2011 – JUL/AUG 2012)....................................................48
Table 34: Growth of Financial Institutions...................................................................................................50

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 Development of Capital Market and Behaviour of Stock Price in Nepal
(A case study from 2006/07 to 2010/11)

Explanatory Notes

1. The Nepalese fiscal year generally begins on mid July (1 st Shrawan) and ends on mid July
(31st Ashad).

2. Following table presents the equivalence of study year of Nepalese calendar, with Gregorian
Calendar

Nepalese Calendar Gregorian calendar Study year

st st
1 Shrawan 2063 - 31 Ashad 2064 17 July 2006 – 16 July 2007 2006/07
1st Shrawan 2064 - 31st Ashad 2065 17 July 2007 – 15 July 2008 2007/08
1st Shrawan 2065 - 31st Ashad 2066 16 July 2008 – 15 July 2009 2008/09
st st
1 Shrawan 2066 - 31 Ashad 2067 16 July 2009 – 16 July 2010 2009/10
1st Shrawan 2067 - 31st Ashad 2068 17 July 2010 – 16 July 2011 2010/11

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 Development of Capital Market and Behaviour of Stock Price in Nepal
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Acknowledgement

I always envisaged that producing a dissertation would be rather a lonely experience but this has
been the opposite. Writing up stage has brought me into contact with so many new friends who
gave me support, challenged my ideas, and turned doing dissertation writing into an enjoyable
and exciting time.

Firstly, I would like to express my profound gratitude to my dissertation supervisor Sunita Kotta,
of London School of Business and Finance, for her guidance with valuable comments and kind
support to me all the way throughout the period

Special thanks goes to Mr. Kamal Bahadur Kayastha, Librarian of Central Library, Tribhuvan
University, Nepal, for providing all the references material that I needed during research time.

I am grateful to my brother John Maharjan for his continuous support and help, without whom
my research work would have been impossible. I also express thanks to all my friends, well-
wishers and those individuals and institutional personalities who are directly and indirectly
involve in conducting this research for their help, suggestions and motivation to finish the
research on time.
Last but not the least I would like to thank my wife, Ganga Prajapati for her support.

Lastly, I hope that this research paper will serve as a stepping stone to all those interested in
capital market including economist, intellectuals, teachers, students, investors, general public and
to those who wish to make further researches under this topic.

………………………
Raj Kumar Maharjan
27 September 2012

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 Development of Capital Market and Behaviour of Stock Price in Nepal
(A case study from 2006/07 to 2010/11)

Abstract

Writing of dissertation started with two general aims “development of capital market” and
“applicability of behaviour share price in changed scenario” that needed to test in least developed
country like Nepal.
There had been many research done in Nepalese capital market, but very few study been carried
out to see capital market had developed in real sense. Align with above statement this research
was conducted to fill the gap by justifying Nepalese capital market had developed. Historical
data from fiscal year 2006/07 to 2010/11 were studied and analysed that used more than one
tools like Karl Pearson’s coefficient co-relation, in terms of listed and traded companies, ratio
analysis of market size and liquidity, and growth analysis of those indicator directly related to
capital market.
Like many South Asian country Nepal’s bond market had not been as active as it is in developed
country. Bond market of Nepal just accounts thirteen percent of entire capital market and
research had explicitly used Nepal Stock Exchange variables to justify capital market of Nepal
had developed since 2006/07.
The tools stated above to measure development had provided sufficient evidence to conclude
capital market had developed. Top of that the infrastructure, Central Depository System, Credit
Rating Agency and additional of new mutual funds, were a core aspect of development of
Nepalese capital market.
Another aspect of the research aim was to test whether in changed scenario; theory of share price
behaviour was applicable. For this purpose successive price changes of nine sample companies
had been studied using daily (01/04/2012 – 13/09/2012) and monthly (Jun/Jul 2011 – Jul/Aug
2012) run test.
These run test had rejected the null hypothesis to conclude that Nepalese capital hold an
inefficient market. In simple word the future share price could be predicted with the past price
movement.
Therefore, conclusion made was gradual development of capital market did not mean to define it
as developed capital market and it should not follow the international norms of share price
behaviour theory.

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Chapter 1: Introduction
1.1 Background

This dissertation has been carried out in partial fulfilment of the Master’s Degree in Finance,
University of Wales for the year 2011/12.
The title, “Development of Capital Market and Behaviour of Share Price in Nepal: A case study from
2006/07 to 2010/11”, itself justifies the importance of research for finance degree sought. Many
researchers had conducted in this topic worldwide and in Nepal too, however, the previous research
done in this filed in Nepal is not satisfactory in terms of scope and area that covered.
In underdeveloped country like Nepal UNCTAD 1 (2011), the development and growth of capital
market, especially stock market has been widespread in recent times. Despite the size and illiquid
nature of stock market, its continued existence and development could have important implications
for price behaviour theories. Koirala (2009) has noted that even in less developed country, capital
markets are able to mobilize domestic savings and able to allocate funds more efficiently.
Of course, the gradual improvement and the changing scenario made researcher to do some in depth
research in this topic hoping the conclusion made would be beneficial for investors and fill the gap
between the researches.
This research is more concentrate to study development of Nepalese capital market in recent time
and to link the price behaviour theories whether it is applicable in present situation or not. Moreover,
it explores about the signalling factor to see how the secondary market has responded on that
situation.

1.2 Financial Market

Financial markets can be defined as the centres or arrangements that provide facilities for buying and
selling of financial claims and services. In this term, the role of financial system in economic
development has been a much-discussed topic among economists. Financial markets perform four
important economic functions.
First, they enable individuals to choose more effectively between current and future consumption.
Second, the interaction between buyers and sellers in a financial market determines the price of the
assets, or alternatively, the return demanded by investors to invest in the company. Firms can raise
further capital if the return on their investments exceeds the return demanded by investors.
Third, financial markets provide liquidity to investors. That is, the owner of the financial asset can
sell off the asset in the marketplace to realize cash whenever required. The degree of liquidity may
vary from asset to asset and market to market.
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Fourth, financial markets can discipline under–performing managements. The prevailing stock price
of a company reflects the opinion of all market participants regarding the outlook for the company
under the current management.
Donwa and Odia (2010, p. 137) has catogrised financial market in money market and capital market.

1.2.1 Money Market

Money market is a short –term financial assets market that facilitates liquidity and marketability
securities. These securities include Treasury bills, commercial paper, federal funds, repurchase
agreements, negotiable certificates of deposit, banker’s acceptances etc. Money market securities are
used to “warehouse” funds until needed. The returns earned on these investments are low due to their
low risk and high liquidity (Mishkin and Eakins, 2012, p. 276)

The development of an efficient money market requires the development of institutions, instruments,
and operating procedures that facilitate widening and deepening of the market and allocation of
short-term resources with minimum transaction costs and minimum of delays.
Though money market is not a related topic of this research, so capital market will be discussed in
details.

1.2.2 Capital Market

Capital Market plays an essential role in an economy that allows investor’s fund to gorge potential
opportunity, i.e. saving funds are mobilise and channelled efficiently to users. Capital markets
provide an effective way of procuring long-term funds by issuing shares and debentures or bonds for
corporate enterprises and government and at the same time provide an investment opportunity for
individuals and institutions (Adhikari, 2004, p. 75). Households, often through investing in pension
and mutual funds, are net investors in the capital markets Corporations and the federal and state
governments are net users of these funds. (Mishkin and Eakins, 2012, p. 299)
The capital market is a market where borrowing and lending of long-term funds takes place so in
brief it deals in both debt and equity.

1.3 Capital Market Instruments

The instruments are the securities that are traded in the stock market. The instruments can be
catogrised into three major groups of securities according to Herbert (2004 cited in Josiah et al.,
2012, p. 8). These are:
◦ Ordinary shares
◦ Preference shares
◦ Debt instruments

In recent time, derivatives are also included very important capital market instruments.
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1.4 Types of Capital Market
1.4.1 Primary Market
According to Mishkin and Eakins (2012 p. 18), Primary market is a market in which new issues of a
security, such as a bond and stock are sold to initial buyers by corporation or government agency.
Both the Securities Board of Nepal (SEBON) and the Nepal Stock Exchange (NEPSE) are involved
in primary market activities in Nepal.

1.4.2 Secondary Market

This enhances the new issue market in many ways, it provides the means by which investor can
monitor the value of their shares and liquidate them when they wish to do so. It is a market where
existing securities are traded on daily and continuous basis. It is the market for existing securities.
This consists of exchanges and over-the counter markets where securities are bought and sold after
their issuance in the primary market (Mishkin and Eakins, 2012, p. 8).

1.4.3 Importance of Secondary Market

If there were no secondary market in which investors could turn investments in new issues back into
cash when they choose, many investors would not buy new issues in first places. If any investors
truly intend to make any irrevocable commitment of their funds, the availability of a secondary
market is an absolute pre-requisite to the existence of a primary market in common stock. From the
perspective of the overall economy, the secondary augmentation of the flow of funds into the new
issue market is particularly important. It makes it possible for the economy to make long-term
commitment in real capital. This point is perhaps best illustrated by considering what would occur if
the financial claims issued by firms and individuals could not be traded in the secondary market.
The secondary market makes it possible for those who desire to make long-term real investments to
obtain the money capital of savers who have no intension of committing themselves for the long
term. Thus, they provide the economy with the opportunity to consider entirely new approaches to
building its capital stock (Josiah et.al, 2012, p. 10).

1.5 Purpose and Scope

Development of capital market is must for a sound industrial development of the country like least
developed country Nepal.

Capital market helps to mobilize the surplus unit to deficit unit for productive investments. As it
mobilize the scattered resources and channels them in productive sector. It is an effective instrument
of expanding productive capacities of the country. In Nepal, unfortunately, despite a history of half
decade of planned economics activities to develop real sector of a country, little attention was paid to

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the development of financial market. Over the past, one and half decade financial market, despite
many problems, has developed significantly in Nepal.

Stock Exchange in many countries has a long history of more than one century. For example, the
India stock market has a history of more than 130 years (Mishra et. al, 2010, p. 50). The stock
exchange of Nepal has not so long history and it has faced so many ups and downs during its short
history. However, gradual improvement in infrastructure and policy has given strong fundamental
base for the Nepalese Capital Market.

Past decades has witnessed several new practices in Nepalese capital market. During this period a
several initial public offering (IPOs) were made. Many new stocks have been listed in NEPSE. The
listing of more agro-based industries like Dairy Development Corporation, telecom and hydropower
have made the share market more reflective of economic growth. Having the sensitive nature,
economic, social, and political interference would directly affect on capital market and development
of capital market in any country and its effective growth is depended upon the aggregate economic
condition, saving and investment opportunity etc.

Although there are various institution involved in capital market, they have not been able to show
good performances according to the expectation of investors. At the same time, there is no denying
in the fact that investors are responsible for not having self-control, self-judgment in the choice of
securities for investment. Thus having lack of adequate knowledge about the securities of certain in
companies, investors are haphazardly investing in shares. Therefore, it is necessary to do some
research on Nepalese capital market in changing situation. Therefore, the purpose of this research is
to facilitate the knowledge to all interested stakeholders of capital market.

1.6 Research Aims

In Nepal since capital market establishment in 1993, it has witnessed many changes. Specifically the
changes were on the regulations and infrastructure. Establishment of Central Depository System
(CDS2), Credit Rating Agency (CRA), and addition of more mutual funds 3 have definitely changed
the scenario. Well it is not deniable that Nepal is least developed country (UNCTAD, 2011 p. 194)
however, the corrective approach towards capital market had helped it to explore. Compare to
previous last five years its scope has increased and the involvement of both investors and borrower
had plenty space for development. That is the reason, the main aim of this research is to explore

2
CDS has started its trading since July 16, 2012.
3
Three mutual funds backed by commercial banks are in course to start shortly.
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whether in real sense capital market has developed since FY 2006/07 or not and to link the share
price behaviour theories to the changing scenario.

1.7 Research Questions

1. What are the present state, status, and elements that affect NEPSE index?
2. Which price behaviour theories explain the best form of Nepalese capital market?

1.8 Research Hypothesis

The dissertation formulates the following testable statement:

Hypothesis 1
H0: Capital Market has developed in Nepal.
H1: Capital Market has not developed in Nepal.

Hypothesis 2
H0: There is no difference between NEPSE index before and after signalling factor.
H1: There is difference between NEPSE index before and after signalling factor.

Hypothesis 3
H0: The successive price changes are independent.
H1: The successive price changes are dependent.

1.9 Research Objectives

The objectives of the study are as follows:
1. To analyze Nepalese capital market development / growth
2. To examine sector wise overall movement of NEPSE Sensitive index to find out risky sector.
3. To investigate if political and regulations are the factor that has effected NEPSE index.
4. To investigate the predictability of future share price in Nepal

1.10 Design of the Research

1.10.1 Introduction
This research contains six chapters including introduction. Introduction chapter deals with the
general terminology of the research. As a whole, this chapter will demonstrate general understanding
of the financial market followed by detail components of capital market. Research aims, research
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question, research hypothesis, and research objectives are also discussed in details, which this
research has tried to find. The aim of this research is to explore whether in real sense capital market
has developed since fiscal year (FY) 2006/07 or not and to link the share price behaviour theories to
the changing scenario. To achieve this aim two-research questions were established. Further,
research hypothesis and objectives have been set.

1.10.2 Literature Review

This is second chapter that solely concentrate on the literature review regarding capital market, and
the indicators used to define development of capital market. As developed capital market is very
different prospectus than development of capital market. So this research is mainly motivated to
analyze the present Nepalese situation of capital market (FY 2010/11) compare to FY 2006/07.
Therefore, this part extensively concentrates on literature review that deals with development of
capital market.
As capital market grows or developed then this must bring some changes in the share price
behaviour. Therefore, some literatures of stock price behaviour have been also conducted as well.

1.10.3 Methodology
Nature of the research is very sophisticated as it deals with the indicator to measure development of
capital market. That is the reason more than one approached has been used to justify development.
Hypothesis is established to see whether Nepalese capital market had developed in recent year or
not. For this, widely accepted Karl Pearson’s Coefficient is used to justify with relation between
listed companies and traded companies. Probability error (P.E.) is used to determine the significant
relationship. Likewise, ratio analysis and growth analysis have been analysed for present state and
status of Nepalese capital market.

1.10.4 Findings/Results
This research has been conducted in the time where Nepalese capital market has changed
significantly. Infrastructure development like Central Depository System (CDS), Credit Rating
Agency (CRA), addition of three new Mutual Funds, addition of brokers had taken place. Addition
to that more companies was listed and so as tradable scrip. With all these improvement this research
expects to find that capital market of Nepal has developed compare to last five years and it holds the
efficient market theories. In simple, future price, prediction is not possible in changing scenario.

1.10.5 Analysis/ Discussion of Findings

This chapter is design to analyze the findings. A finding from the primary information will try to
relate with the literature review. Analysis has found that capital market has developed since FY
2006/07 but it does not necessarily hold either the principle of market. Effectively, Nepalese capital

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market runs in an inefficient form. Regarding primary data more than 65% of respondent expressed
that capital market had developed. Almost all the result that obtained from primary data matched
with the secondary data findings.

1.10.6 Conclusions/ Recommendations

This is the last chapter of the research, which deals with the main conclusion based on the analysis.
This will explicitly answer to what extent the research aims, questions, hypothesis or objectives have
been met. Further, recommendations will be made accordingly.
It is discussed above that research has found development in Nepalese capital market but it had
denied the price behaviour theory. Therefore, the conclusion made was development of capital
market does not necessarily mean it is a developed capital market. Nepal is least developed country
that is the reason underline aspect of efficiency market hypothesis or random walk theory does not
seem to be true. In simple sense, future share price can be predicted in Nepal.

Chapter 2: Literature Review

2.1 Capital Market

Capital Market helps flow of non-productive small savings spread among the people to the
productive sector through mobilization. Capital Market establishes working relationships
between the people engaged in saving, mobilization, and investing capital. A capital Market play
a vital role in the economy as it mobilizes the unproductive financial resource in productive
sectors of the economy (Nepal Rastra Bank, 2012).
The capital market is one of the most vital areas of the economy as it provides companies access to
capital, and investors with a slice of ownership in the company and the potential of gains based on
the company's future performance (Ujunwa & Modebe, 2012, p. 224). Some study defined capital
market as a long-term source of funding. Dixit (2007, p. 31) defines capital markets as “the market in
which corporate equity and longer- term debt securities (those maturing in more than one year) are
issued and traded. In broad sense, capital market incorporates intermediary institutions, capital

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formation, mobilization, and channelling of long-term capital, as well as regulatory authorities
(Obiakor and Okwu, 2011, p. 84).
Whereas some has defined as the market where, lenders (investors) provide long-term funds in
exchange for long-term financial assets offered by issuers. The market is an important institution for
capitalist countries because it encourages investment in corporate securities, providing capital for
new businesses and income for investors (Ujunwa and Chikeleze, 2007, p. 126). Therefore, to
facilitate the transformation of assets Alice (2007 cited in Obiakor and Okwu, 2011, p. 82) had
provided different view, as he clarifies that the capital market is made up of markets and institutions,
which facilitate the issuance and secondary trading of long-term financial instruments.
Aligning with this, Zegada (2012) conceptualize capital a collection of financial institutions set up
for the granting of medium and long-term loans. Further, they considered the stock market as single
nor even a dual market but rather a network of specialized financial institutions, which, in various
ways, help to bring together suppliers and users of long-term capital fund. Eventually, capital
market does not only provide the long-term capital instead, it has many functions (id).
The capital market is unique in a country's financial system because of its peculiar function in the
economy. Levine (1991 cited in Ujunma & Modebe 2012, p. 224), identified these roles as: raising
capital for business, mobilizing savings for investment, facilitating company's growth, redistribution
of wealth, promotion of corporate governance, creating investment opportunities for small investors,
government capital raising avenue for development projects and being a barometer of the economy.
Capital Market helps flow of non-productive small savings spread among the people to the
productive sector through mobilization. Capital Market establishes working relationships
between the people engaged in saving, mobilization, and investing capital. A capital Market play
a vital role in the economy as it mobilizes the unproductive financial resource in productive
sectors of the economy (Nepal Rastra Bank, 2012).

Recent research has defined capital market in broad sense as network of specialized financial
institutions, series of mechanism, processes and infrastructure that in various way facilitate the
bringing together of suppliers and users of medium to long term capital for investment in economic
development projects (Al-Faki cited in Kolapo and Adaramola, 2012, p. 12)

2.1.1 Capital Market Development Indicator

Capital markets are a vital part of the financial development and economic development of a
country. This is the reason several attempts have been made by previous researchers to link the
development of capital market with the economy (Kolapo and Adaramola, 2012, p. 12).
In other word, development of capital market has been linked with the economic growth. According
to BüyükŞalvarci and AbdìoĞlu, (2011, p. 13044), “Capital market plays crucial role in mobilization
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of domestic resources and channelling them efficiently to raise economic production and
productivity. The level of capital market development is thus an important determinant of a country’s
level of savings, efficiency, and investment and ultimately its rate of economic growth”. Therefore,
in general, economic barometer that reflects the development of capital market in any country.
It has been clear from above that capital market is very important for the country. So is there any
indicator to measure development of capital market?
Numerous researches had conducted regarding to measure development of capital market. It is
explained earlier that capital market has strongly linked with economic growth. In this sense,
famously used indicator is gross domestic product (GDP).
Obiakor and Okwu (2011, p. 82) had considered relevant indicators of economic growth and
performance of capital market; such are GDP, market capitalization value of shares traded foreign
private investment and gross capital formation. They had found that development of capital market
has positive relation with economic growth. In simple, the economic growth can be defined as capital
market development.
Giri (2009), using gross capital formation and number of quoted companies as measures of capital
market development, found that capital market development has positive significant impact on
economic growth.
Torre, Gozzi and Schmukler (2007), examined the impact of reforms of capital markets on economic
development in Latin American countries. For measures of capital market development, they used
market capitalization, value traded, and capital raised. On the same time, they used annual inflation
rate and ratio of government deficit to GDP as alternative indicators.

Beck et al. (2006 cited in Barna and Mura 2010, p. 32) also, found a positive correlation between
capital market development (measured by a dummy variable computed to reflect if the market
capitalization exceeds 13.5% of GDP) and economic growth. Stock market is part of the capital
market and plays significant part in development of capital market. Many researchers have used this
model. Bose (2005 cited in Brasoveanu et al. 2008, p. 65) offers a theoretical financial model that
explains the positive correlation between stock market development and economic growth; the
model is based on the hypothesis that for levels of GDP per capita higher than a certain threshold the
information costs become lower than bankruptcy costs, determining the development of capital
markets.

Some research papers had tried to explore development of capital market with distinct view.
They suggest the existing of a clear and positive relationship between market liquidity and economic
growth. Empirical studies provide some support to above statement. In a cross-country regression,

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Levine and Zervos (1998 cited in Næs et al, 2010) found a significant positive correlation between
stock market liquidity and current and future rates of economic growth, after controlling for
economic and political factors.
Shifting from the above argument, some has linked capital market efficiency as the future economic
growth. Where Mark (2011 cited in Ujunwa & Modebe, 2012, p .223), explains improving the
efficiency of the capital market has become a recognized means of meeting national objectives such
as enhancing productivity and competitiveness, reducing local environmental costs associated with
capital market transactions, promoting savings and investment on economic wide basis. At
international level, it is considered a key element of strategy to mitigate the risk" of capital flight
associated with lack of international investors' confidence in the market. In this context, improving
capital market efficiency in the developing and transitioning countries is particularly important
because these countries exhibit considerable potential for such improvement and, in the case of the
developing countries (Ujunwa and Salami, 2010, p. 12).
However, Grais and Vittas, (2005, p. 46), had provided contrasting view other than explained above
as “…the challenge of increasing the liquidity of markets, enhancing their transparency, and ensuring
their integrity as capital market development.” They further explained, it is, in fact, increasingly
underscored that what matters for achieving the economic benefits of securities markets, it not the
number of listed companies and total market capitalization but rather the market liquidity in an
environment of transparency and integrity.
In recent research, different approach had been used to define development of capital market. Some
research had used financial sector as the indicator and other had used awareness level as an indicator
of capital market development.
Consensus exists on the positive relationship between the size and depth of the financial system and
the supply and robustness of financial services that are important contributors to economic growth
By financial system, it means development of financial institution that provides capital either way to
needed institution, World Economic Forum (2011).
Supporting above statement Paramati and Gupta, (2011, p. 132) explained that financial sector
development facilities capital market development and in turn raises real growth of the economy.
With a different approach Josiah et al, (2012, p. 12) had provided the same view. They explained in
their research with the broad classification of capital market are the security market and non-security
market. The non-security, which comprises of bank and bank related institution, mainly intermediate
in debt and debt related instruments. This type of financial market institution performs mostly in
developed capital market, which supports the view of development of capital market.

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Capital market consists of share market and debt market. Therefore, some research shows
development of stock market reflects the development of capital market. Stock Market are the
catalyst for enhancing the operations of the entire domestic financial system and the Capital Market
in particular Kenny and Mosh (1998, cited in Obiakor and Okwu (2011, p. 80). This view is more
applicable to least developed country like Nepal where more than 80% of capital is raised through
share market.
Linking equity market with the development of capital market has showed positive impact. This has
been proved by previous study. Beckaert, et al. (2005 cited in Brasoveanu et al. 2008, p. 65)
analyzed financial liberalization as a special case of capital market development and determined that
equity market liberalizations, on average, led to a 1% increase in annual real economic growth.
Using panel data analysis from 1980 to 2000, encompassing 108 countries Chinn and Ito (2005) had
indicated that banking sector growth is necessity for stock market development in these two types
of financial market have synergistic effects.

Capital Market have significant stake on Gross Domestic product (GDP) of the national economy,
which creates the employment opportunities through capital formation and growth as a whole.
Nevertheless, only existence of the capital market does not guarantee the significant contribution for
the GDP and economic growth. The mechanism created the micro level saving mobilization, an
opportunity and challenges, too. The financial literacy and awareness level, i.e. investor’s literacy,
education and knowledge, might be the crucial elements for the healthy growth of the market
(Kadariya et.al, 2012, p. 2). Investor awareness is the knowledge of investment and about the
important updates of the market. To expand and to achieve the sustainable growth of economy,
investor awareness and their commitment for the long-term investment play the vital role. Thus, it is
expected that the awareness and the commitment move in the same direction, and their association
contributes a lot to the economic development.
It is mentioned previously that liquidity as an indicator that explain development of capital market.
Some researchers had done an exceptional research to show that liquidity can be achieved by
participation of educated investors.
According to Kadariya et al (2012, p. 13),”Investor awareness is crucial for the investment decision
making and sustainable growth of capital market”. They further explain that fully aware equity
investors have more chances of holding high volume of equity investment.
Equity investors with higher educational background have more investment than those with lower
level of education (Kadariya, 2012, p. 29) and that is crucial for the investment decision making and
sustainable growth of capital market (Kanadriya et al. 2012, p. 14).

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2.2 Theories of Stock Price Behaviour
Simply stock price behaviour refers the movement of stock price in the secondary capital market, i.e.
market value is more than book value, market value is less than book value and market value is more
than book value due to the different internal and external factors. It always been panic to investors
how their shares performs in market. By the nature, they always want to gain through security
trading, which is impossible without proper understanding of market they invested.

2.2.1 Market Efficiency

A market is efficient if it uses the information available correctly in setting and adjusting prices of
securities. Inoga (1997 cited in Josiah et al, 2012, p. 12). Market efficiency refers to two essential
ingredient of price adjustment to new information. It is Speed and quality (direction and magnitude)
of the adjustment. The main effect of efficiency in capital market is that it precludes most investors
from the capacity or ability to out-perform the market. However, the market is deficient in term of
speed and quality of it reaction, the sophisticated investors would have little difficulty in profiting
from the situation. There are two important theories available
1. Efficient Market Hypothesis (EMH)
2. Random Walk Theory (RWT)

2.2.2 Efficient Market Hypothesis

Eugene Fama first introduced EMH in year 1964 in early 1960. Fama’s contribution in efficient
market hypothesis is significant. The EMH states that the current market price reflects the
assimilation of all the information available. This means that given the information, no prediction of
future changes in the price can be made. As new information enters the system, the unbalance state
is immediately discovered and this is quickly eliminated by the correct change in the price (Ma and
Wong, 2012, p. 5473).
According to Ma & Wong (2012, p. 5473) made a distinction between three levels of market
efficiency.

2.2.2.1 Weak Efficiency

A market is efficient in the weak form if share prices fully reflect the information implied by all prior
price movements. Share price movements become total independent of previous price movement
implying the absence of only price pattern with prophetic significance
Prices would only respond to new information such as new economic event of new industry.
The implication of this is that historical price and returns information does not provide a basis for
superior forecasting of future price or returns. Therefore, past information cannot help investors beat
the market and make excessive returns.

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2.2.2.2 Semi Strong Efficiency
This is efficient on the semi strong sense if share price respond instantaneously and unbiased to new
published information. The implication of semi strong efficiency is that current share prices would
invariably represent the best interpretation of the information about the firm
Therefore, it becomes futile for investors to search for bargain opportunities from analysis of
published data, such as annual reports or other corporate announcements designed to lure them to the
market.

2.2.2.3 Strong Efficiency

The market is efficient in the strong form if share prices fully reflect not only published information
but also all relevant information including data not yet publicly available
To conclude the review on the efficient capital market theory, it can be asserted that if prices and
returns prevailing at any point in the capital market do reflect all available historic and current public
information, it will be difficult for investors to achieve superior performance by judging that security
market conditions may be better or worse in the future.

2.2.3 Random Walk Theory

In year 1900 a French mathematician, Louis Bachelier wrote a scientific paper suggesting, that daily
security price fluctuation were random which later known as Random Walk Theory. According to
the theory, stock price changes have the same distribution and are independent of each
other, so the past movement or trend of a stock price or market cannot be used to predict its future
movement Falinouss (2007, p. 21).
In short, this is the idea that stock prices take a random and unpredictable path. Followers of the
random walk theory believe it is impossible to outperform the market without assuming additional
risk. 
Random Walk theory has similar theoretical underpinning to semi strong EMH where all public
information is assumed to be available to everyone. However, RWT declares that even with such
information, future prediction is effective.
From EMH and RWT two distinct trading philosophies have been emerged. These two conventional
approaches to financial market prediction are technical and fundamental analysis. In the following
sections, the distinctions between these two approaches are stated.

2.2.4 Technical Trading Approach

Technical analysis is based on time series data. It tries to forecast stock markets using indicators of
technical analysis. It is based on the widely accepted hypothesis, which says that all reactions of the
market to all news are contained in real time prices of stock. Because of this, technical analysis
ignores news. Its main concern is to identify the existing trends and anticipate the future trends of the
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stock market from charts. However, charts or time series data only contain the event and not the
cause why it happened (Kroha and Baeza- Yates, 2004, p 2).
In technical analysis, it is believed that market timing is critical and opportunities can be found
through the careful averaging of historical price and volume movements and comparing them against
current price. Technicians utilize charts and modelling techniques to identify trends in price and
volume. They rely on historical data in order to predict future outcomes (Schumaker and Chen, 2006,
p. 3). There are many promising forecasting methods developed to predict stock market movements
from numeric time series. Auto regression and moving average are some of the famous prediction
techniques, which have dominated the time series prediction for several decays (Sewell, 2008, p. 5)

2.2.5 Fundamental Trading Approach

Fundamental analysis developed by Thomsett in 1998 investigates the factors that affect supply and
demand. Fundamental analysis is a research method that involves studying basic financial
information to forecast profits, supply and demand, industry strength, management ability, and other
intrinsic factors that affect a stock's market value and growth potential (Thomsett, 1998 cited in
Sutheebankjard and Premchaiswadi, 2010, p. 88). The goal is to gather and interpret this information
and at before, the information is incorporated in the stock price (id. 2010, p. 88)
In this philosophy, the price of a security can be determined through the details of financial numbers.
These numbers are derived from the overall economy, the particular industry’s sector, or most
typically, from the company itself. Figures such as inflation, interest rate, industry return on assets,
debt levels, and price to earning can all play a part in determining the price of a stock Schumaker and
Chen (2006, p. 4).

2.3 Capital Market: Global Perspective

Modern capital markets have two related parts: (1) the debt and equity markets that intermediate
funds between savers and those that need capital, and (2) the derivatives market that consists of
contracts such as options, interest rate, and foreign exchange swaps, typically associated with these
underlying debt and equity instruments.

According to Dudley & Hubbard (2004, p. 4).debt and equity markets help allocate capital within an
economy. The derivatives market helps investors and borrowers to manage the risks inherent in their
portfolios and asset/liability exposures. The global capital market is gaining depth every day. Along
with the development of this market, the liquidity is also growing at a rapid pace. Financial stocks
are growing worldwide and their growth rate is much higher than that of global gross domestic
product (AllianceBernstein, 2012, p. 1)

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The size of stock and bond markets around the world in August 2011 shows that global capital
market has reached all time high with $ 212 trillion of which 75% consists of bonds, ($175 trillion)
and 25% of stock ($54 trillion) (McKinsley & Company, 2011, p. 2). The total derivatives have
reached to $700 trillion at the end of August 2011(Mann, 2011). According to The City UK (2011
a), that global bond market grow by 5% more in 2010 to record $95 trillion, more than two third the
size of equity market.

The development of the global capital market can also be traced by the fact that the financial
holdings of the world is growing quickly. The global stock of debt and equity grew by $11 trillion in
2010, McKinsley & Company (2011, p. 2), where as the value of the global market increased by 5%
in 2010 to $ 54.9 trillion following a 45% rise in the previous year (The City UK, 2011 b, p. 4)
Capital markets have been the driving force behind the development of the UK and US financial
systems.
In the US, the capital markets have become the dominant element of the financial system in three
ways.
First funds raised in US debt markets now substantially exceed funds raised through the US banking
system (McKinsley & Company, 2011: p 4)
Second, more 36% of US households owned equity in some form (The Big Picture, 2012)
Third, the derivatives market has grown extraordinarily rapidly. In U.S., the notional value of
derivatives securities outstanding rose to $244 trillion in September 2011 (Mann, 2011) from about
$6.7 trillion at year-end 1990. Interest rate swaps has an estimated of 82.1% of derivatives
representing the biggest share of this market 10.6% in foreign exchange rate swaps, 6.1 % in credit
derivatives, and 1.2 % are in commodities and equity contracts(Comptroller of Currency
Administrator of National Banks, 2012)

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Figure 1: Major Holders of U.S. Equities

Source: The Big Picture, 2012.

In these circumstances, the US is playing a vital role in the development of the global capital market.
U.S. alone is the destination of 85% of the net capital flow of the entire globe. Britain also plays a
significant role in the market. (McKinsey & Company, 2011, p. 8).
Separate data from Securities Industry and Financial Markets Association (SIFMA), puts the US
bond market at just under $37 trillion as of the end of 2011 and Bloomberg puts US stocks at about $
21.4 trillion by the end of April 2012 (qvmgroup, 2012).

Figure 2: Market Capitalization of Listed Companies (%GDP)

Source: World Bank 2012 and the Author (see appendix O).
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Figure 3: Market Capitalization of Listed Companies in SAARC region

Note: India’s data excluded (very big numbers), Afghanistan, Bhutan, Maldives data are not available
Source: World Bank 2012 and the Author (see appendix P)

2.4 Capital Market: Asia

In the past few decades, Asian countries have experienced a tremendous economic growth, although
temporarily interrupted by the Asian financial crisis. Along with the strong economic growth, capital
markets in this region have shown a rapid expansion, and have played an increasingly important role
in fostering economic development (Hsu, 2000, p. 3).
Hsu further explains Asian countries have enjoyed abundant savings. Some countries in this region
have domestic savings rates of more than 30 percent. In no other regions in the world do countries
have such large reservoirs of domestic savings at their disposal. Asian’s high savings rates have
provided the platform for robust capital markets.

While Asia has been preoccupied with economic recovery and financial reforms over the past few
years, the economic structures of most Asian countries have been gradually modified, and their
capital markets are in the process of transformation. Along with these changes, several key trends are
emerging in the region’s capital markets, Hariran (2010)
Equity Capital Market (ECM) in Asia (excluding Japan) have had a dismal fourth quarter so far,
raising just $22 billion, worst result since the first quarter of 2009 ($14 billion) and year to date,
ECM volume is down 44 percent from 2010 issuance of $291.1 billion to just 162.4 billion
(Keohane, 2011).

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Figure 4: Asia (Ex Japan) Equity Capital Market Volume

Source: Dialogic cited by Keohane, 2011.

Since the Asian financial crisis in 1997-98, policy makers in Asia and Pacific have put a high
priority on bond market development. As a result, the domestic debt market of Asia and Pacific has
grown rapidly, almost doubling in size from $ 10.5 trillion in September 2004 to $ 20.8 trillion by
March 2011, Shim ( 2011, p. 6).

2.5 Development of Capital Market in Nepal

Institutional development of capital market in Nepal started from the year 1976 when Securities
Exchange Centre (SEC) was established under the companies act with the joint capital contribution
of Nepal Rastra Bank (NRB) & Nepal Industrial Development Corporation (NIDC). The Industrial
Policy of the government also encouraged the promotion of securities exchange activities in Nepal.
Nepal government under a program initiated to reform capital market converted SEC into Nepal
Stock Exchange (NEPSE) in 1993 as non-profit organization, operating under Securities Exchange
Act, 1983.

Nepalese capital market was given proper structure in June 1993 with the establishment of Securities
Board of Nepal (SEBON) as the market regulator. Since its establishment, SEBON has been
concentrating its efforts on the legal and statutory frameworks, which are the bases for the healthy
development of capital market. SEBON Nepal is the supreme body to regulate the Nepalese capital
market (Dangol 2008, and Gurung 2004); however, SEBON is highly influenced by Nepal Rastra
Bank (NRB) and Company Registrar office (Dangol, 2008). As a part of its continuous efforts to

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build a sound system, Institutional Reform and Informal Sector advice to amended the securities
exchange act, 1983 in 1996. In addition, this act was amended for the second time on January 30,
1997.

This amendment paved the way for establishing SEBON as an apex regulatory body as it widened
the horizon of SEBON by bringing market intermediaries directly under its jurisdiction and also
made it mandatory for the corporate bodies to report annually as well as semi annually regarding
their performance. SEBON (Annual Report, 2011).
After the inception of the Securities Exchange Centre (SEC), shares of various manufacturing,
trading and banking companies listed on SEC. By the end of 1990, the listed shares were dominated
by public enterprises. Forty-two companies were listed, out of which more than 25 companies had
some form of government ownership. However, after the democracy, the trend has totally changed,
and the listed number of companies reached at 207 by the end of FY 2010/11 4, while the government
ownership companies had decreased due to the privatization that took place in different planning
stage of privatization act (Maharjan, 2010, p. 4).

2.5.1 Current Structure of Capital Market in Nepal

After the establishment o f SEBON in 1993, equity market grew rapidly. In Fiscal year (FY)
2010/2011 47 companies ,comprising seven commercial banks, 21 development banks, 10 finance
companies, two insurance companies and one hydropower company had issued new shares for the
total amount of Rs. 6777.2 million.
During the FY 2012, SEBON prioritized the established of basic infrastructure and development of
related regulation regarding Central Depository system (CDS), Mutual funds and Credit Rating
Company (CRC) (SEBON, Annual Report, 2010/11). On the same time, SEBON had approved 16
companies for public issue worth Rs. 2028.44 Million.
Total par value of listed shares in mid September 2012 is Rs.198257.83 Million, which had a market
capitalization of Rs.399586.48 Million. As on same time, 223 companies have listed in NEPSE.
As on mid September, bond market hold as little as 13.8 percent of total issue in capital market,
where as equity constitutes 86.1 percent and just 1% is preferred stock (NEPSE, 2012).
Further, of the listed bonds, 82 percent are government issued and only 18 percent are corporate
bonds (NEPSE, 2012).

4
The Nepalese fiscal year generally begins on mid of July (1st Shrawan and ends on mid July (31st Ashad)
See Explanatory Notes for equivalence of Nepalese calendar year with the Gregorian calendar year
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Figure 5: Capitalization of Nepalese Capital Market

Source: NEPSE Database, 2012 and the Author.

2.6 Research Gap

Although some very valuable researches in the field of capital market have been done so far in
Nepal. There is still a great opportunity and to explore and identifying new data about the capital
market of Nepal.

Nowadays, Nepalese share market has entered to the new horizon. Its size and market capitalization
are growing day by day. , SEBON has always emphasizing the important of capital market, which
has changed the investor’s vision. The scope of NEPSE has changed since its gradual improvement
of infrastructure and additional of mutual funds and market maker. New Byelaws are being
established to control stock market price. Therefore, there is need to analyze the share price
behaviour theory in Nepal with changed scenario. Obviously Nepalese capital market has changed in
many sense compare to 2006/07.

Nepal is least developed country categorized by United Nation in 2010. So the Nepalese capital
market is truly an under develop market but it is significant in terms of the degree of development,
volumes of trading and in terms of its tremendous growth potential.
Mainly this research will fill the gap between the previous research with updated capital market data
and scenario and types of market efficiency that exist in present Nepalese capital market.

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Chapter 3: Methodology
3.1 Introduction

This chapter refers to the overall approach to the research process, covering from theoretical
underpinning to the collection and analysis of data. It is composed of both parts of technical aspect
and logical aspect. Specially, this chapter has focused on research design, sample size, sample
selection procedure, data collection procedure, data processing, period covered, data analysis tools
used in this research such as financial and statistical tool are discussed.

3.2 Research Design

The research uses an inductive approach. Research design of this study is descriptive and analytical
in nature and includes both qualitative and quantitative data.

3.3 Population and Sample Size

In FY 2010/11, with the listing of 33 new companies, merged of two companies to form single
company and delisted of Nepal Development Bank, the total number of listed companies reached to
be 207 an increment of 18%. All of the listed companies in the NEPSE considered as population,
among them, nine companies have been chosen as sample for the study, which represents 4.35% of
the population.

Table 1: Sector wise Company, Population & Sample Size and Study Year

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S. No. C ompanie s Se ctor Nu mbe r of % Numbe r Study Ye ar
Liste d of S ample (5 Ye ars)
C ompanie s

1 Standard Chartered Bank CB 23 11 1 06/07 -10/11

2 Ace Development Bank DB 61 29 1 06/07 -10/11
3 Nepal Finance Ltd Fin 70 34 1 06/07 -10/11
4 Himalayan General & Insurance Co. Ins 21 10 1 06/07 -10/11
5 Soaltee Hotel Ltd Hotel 4 2 1 06/07 -10/11
6 Unilever Nepal Ltd M&P 18 9 1 06/07 -10/11
7 Bishal Bazar Ltd Trading 4 2 1 06/07 -10/11
8 Chilime Hydropower Co. Hydro 4 2 1 06/07 -10/11
9 Nepal Doorsanchar Ltd Others 2 1 1 06/07 -10/11
207 100 9

Source: NEPSE Annual Report 2010/11

The names of the sampled companies are as follows:

Table 2: Sample Companies, NEPSE Tracker, Sector and Criteria of Selection

S. No. Compani e s NEPS E Se ctor Cre ation of Se le cti on

Tracke r

1 Standard Chartered Bank SCB CB Market Capitalization

2 Ace Development Bank ACEDEV DB Market Capitalization
3 Nepal Finance Ltd NFS Fin 1st Listed Finance
4 Himalayan General & Insurance Co. HGI Ins 1st Listed Insurance
5 Soaltee Hotel Ltd SHL Hotel Maximum trading days
6 Unilever Nepal Ltd UNL M&P Market Capitalization
7 Bishal Bazar Ltd BBC Trading Maximum trading days
8 Chilime Hydropower Co. CHCL Hydro Maximum trading amount
9 Nepal Doorsanchar Ltd NTC Others Applies all

Source: SEBON Annual Report 2010/11, NEPSE Annual Report 2010/11

Note: The company selected for the study has one representative from all sector categorized by NEPSE.

3.4 Source of Data

This research is based on both primary and secondary data. Most of the data related to capital market
(primary market and secondary market) has been collected from Annual Report and Annual Trading
Report of SEBON and NEPSE. Supplementary information had been collected from Ministry of
Finance, publication of Nepal Government (economic survey), Nepal Rastra Bank (NRB) economic
bulletin, and World Bank. The data were mainly downloaded using concerned organisation’s

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website. Same time this research tends to use close-ended and open-ended questionnaire for primary
analysis.

3.5 Data Collection Methods

3.5.1 Primary data:
A primary data was collected through open- ended and close- ended questionnaire. Email was chosen
as channel to distribute questionnaire. These questionnaires were returned mainly in two forms,
email and Express Mail Service (EMS). Answered questionnaires were collected in Nepal on behalf
of researcher and then sent it back via EMS. The respondents were selected from SEBON/NEPSE,
Bank/Finance, Government, Broker, Lecturer/Student, and Corporate house. Sixty-four close-ended
and 10 open-ended questionnaires were distributed. Out of distributed questionnaire, 47 were
collected back but only 40 samples were chosen for research. Information was transferred into SPSS
version 20.0 for thorough analysis. Regarding open-ended questionnaire, just two were returned
back.

3.5.2 Secondary Data:

Secondary data were collected through website. These data were varied from 2006/07 to 2010/11
(see appendix C to N). Some comparative data was collected from 2005/06 (see appendix C and D).
For different objectives, different sets of historical data has been obtain and these collected data were
properly arranged, synthesized, tabulated and calculated in Ms Excel to arrive at the realistic
analytical steps.

3.6 Methods used to achieve Hypothesis

3.6.1 Karl Pearson’s Coefficient co-relation

To test hypothesis 1, i.e. H0: Capital Market has developed in Nepal, H1: Capital Market has not
developed in Nepal; number of traded and listed companies (Gurung, 2004) has been tested using
Karl Pearson’s coefficient co-relation.
n  XY   X  Y
r
 n X     X   n Y     Y 
2 2 2 2

Whereas,
n = number of observation (year)
X = independent variable (Listed Companies)
Y = dependent variable (Traded Companies)
Significance of relationship has been tested by probable error (P.E.)

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 1  r2
P.E.  0.6745 X
N

Decision Criteria,
i. If r < P.E., then correlation is not significant.
ii. If r > 6 P.E., correlation is significant.
iii. If P.E. < r < 6P.E. then nothing can be concluded.
If correlation is significant, then accept null hypothesis.

Rational: Capital market provides an effective way of procuring long-term fund by issuing shares
and debenture or bonds for corporate enterprises and government and at the same time provided an
investment opportunity for individuals and institutions (Adhikari, 2004, p. 39).

3.6.2 t-test: Paired Two Sample for Means where  is unknown

To test Hypothesis 2, different signalling factor that happened during the research period has been
analyzed with t-test.

H0: There is no difference between NEPSE index before and after signalling factor.
H1: There is difference between NEPSE index before and after signalling factor.

Rational: Share market is closely related with the political system in developed capital market
(Joshi, 2010). So this hypothesis tends to see if this is true in case of Nepal.

Model:
t-Test: Paired Two Sample for Means where  is unknown.

( x 1  x 2 )  (µ1  µ 2 )
t
1 1
sp 
n1 n 2

Whereas,

x1 = mean of NEPSE index before signalling factor

x 2 = mean of NEPSE index after signalling factor
(µ1  µ 2 ) = unknown, equals to 0
n1 = number of sectors before signalling factor
n2 = number of sectors after signalling factor

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s p = pooled standard deviation and it is derived from,

sp 
(n  1) s 
1 1  (n1  1) s 2 
2 2

n1  n2  1

Whereas,

s1 = standard deviation of sample NEPSE index before signalling factor.

s2 = standard deviation of sample NEPSE index after signalling factor.
Degree of freedom = 9 + 9 - 2 = 16

Decision Criteria:
If t stat value > t critical value, reject Null Hypothesis otherwise do not reject Null Hypothesis
If t stat value< - t critical value, reject Null Hypothesis otherwise do not reject Null Hypothesis
Signalling factors considered for the study are:
December 24, 2007 End of Monarchy
August 16, 2008 Coalition government lead by Maoist Leader
May 23, 2009 Resignation of First Maoist Prime Minister
May 28, 2011 Constituent Assembly fails to meet for drawing up new constitution
July 15, 2011 Capital gain tax reduced to 5% from 10%
NEPSE index recorded on the possible available date of before and after incident. Discrepancy on
date shows that NEPSE had closed due to holidays.

3.6.3 Run test analysis

To justify with Hypothesis 3 run test analysis has been adopted.
Runs test
The runs test is a non-parametric test that designed to examine whether successive price changes are
independent. Unlike the parametric tests, runs test has a considerable advantage that it does not
require the stock returns to be normally distributed. A run can be defined as a sequence of
consecutive price changes with the same sign. To assign equal weight to each change and to identify
direction of consecutive changes, each change in return is classified according to its position with
respect to the mean return. Hereby, it is a positive change when return is greater than the mean, a
negative change when the return is less than the mean, Worthington and Higgs, (2004 cited in
BüyükŞalvarci and AbdìoĞlu, 2011, p. 13049)
For this purpose, daily and monthly price of sample companies have been analyzed. Daily run test
covers the period from April 1, 2012 to August 15, 2012, and monthly run test covers the period of
June/July 2011 to June/ July 2012)

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Model
n 0 n1
E ( R)  1  2 X
n

2n 0 n1  2n0 n1  n 
S ( R) 
 n0  n1  2  n0  n1  1

R  E ( R)
Z
S ( R)
Whereas,
no = number of zero run
n1 = number of one run
n = n0 +n1 = total number of runs
R = observed number of runs
E(R) = expected R
S(R) = standard deviation of R
Decision has been made according to p-value, where it states that p-value  0.05: reject H0, p-
value  0.05, do not reject H0.
Rational: When capital market develops then that market tends to be efficient, where securities fully
reflects the information to market participants and that by implication, share price cannot be
predicted. Therefore, this hypothesis will see if this applies in contest of Nepalese capital market

3.6.4 Methods used to achieve objectives

Two different concept has been tested to justify objective 1, i.e. to analyze the development/growth
of Nepalese Capital Market, which are i) Ratio analysis, and ii) Growth analysis.

3.6.4.1 Ratio Analysis

This approach has been tested on Market Size and Market Liquidity to analyze development of
capital market.
To measure market size Market Capitalization Ratio (MCR) is used.
MarketCapitalization
MCR 
GDP
Rational: Market size is positively correlated with the ability to mobilize capital and diversity to risk
on an economy- wide basis (Mishra et.al, 2010, p. 51 and Joshi, 2010, p. 71) resulting to
development of capital market.
To measure market liquidity (ML) shares of traded in the stock market is divided by GDP.
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 AnnualTurn over
ML 
GDP
Rational: Liquid capital market allows companies on the one hand, to have a permanent access to
capital through equity issues and on the other hand to allow investors to switch out of equity (Mishra
et.al, 2010, p. 52) and ensuring their integrity as capital market development (Grais and Vittas, 2005,
p. 46).

3.6.4.2 Growth Analysis

General growth formula has been used extensively to analyze growth in different NEPSE index.
At = A0 (1+gn)
Whereas:
At = values at the end of the FY
A0 = value at the beginning of the FY
n = t-1, time period over which growth take place
g = growth rate
For this purpose different indicator of NEPSE index have been calculated, i.e. public issue and issue
amount, number of transaction and annual turnover, paid up value and market capitalization and
securities businesspersons etc.
Rational: Development is the core aspect that can be measure by the growth as a whole (Gurung,
2004, p. 87).

3.6.5 Descriptive Statistics

To achieve objective 2 descriptive statistics is used. For this purpose, historical NEPSE sensitivity
index of different sectors have been analyzed. Moreover, primary data has also been collected to
justify if the perception of the investors shows the same as from secondary data.
Rational: As capital market developed, there are possibilities to diversify investment. Generally,
more investors are attracted to safer investment; however, there has been tremendous investment
across different sectors. Therefore, it is necessary to categorize riskier sector in NEPSE. .

3.6.6 Factor effecting NEPSE index

Objective 3 is designed to answer whether political and new rules are the factor of NEPSE
index movement. This has been answered with the help of primary data analysis. Moreover,
result of hypothesis 2 (t-test) will also be used to examine most effecting factor of NEPSE
index.
Rational: To analyse whether there is any discrepancy with the secondary data.

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3.6.7 Predictability of Share price
Objective 4 is generalised to see if the share price can be predictable in changing scenario of
Nepal. Thus, this objective has been designed to analyse through outcome of hypothesis 3.
According to theory if behaviour of share price does not apply then it can be argued as
inefficient capital market.
Rational: It is necessary to test the implication of theoretical aspect in changing scenario.

3.7 Validity and Reliability

While selecting the listed enterprises, extensive editing and validation procedures were undertaken to
ensure quality and accuracy. The companies were screened using the variables like market
capitalization, volume and frequency of transaction, first listed company among the sectors,
maximum trading days, maximum traded amount, continuity of transaction to represent the listed
enterprises in Nepal.
Proper care has been taken to represent all the sectors, as categorized by NEPSE.

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Chapter 4: Findings and Result
4.1 Findings of Primary Data
For primary research, 65 close-ended questionnaires (see appendix Q) were distributed within 1
month. Out of 65 only 47 were collected back. For the purpose of research, just 40 questionnaires
were qualified. The remaining seven were excluded because some very valuable data’s were missing.

4.1.1 Respondent’s Demographic Information

Table 3: Demographic Analysis

Characteristics Category Frequency Percentage

Sex Female 18 45
Male 22 55
Employment Sector SEBON/NEPSE 8 20
Bank/ Finance 16 40
Government 2 5
Broker 3 7.5
Lecturer/ Student 7 17.5
Corporate House 4 10
Education Level SLC 0 0
Intermediate 3 7.5
Bachelors’ 21 52.5
Masters & Above 16 40
Level of Investment Below 500000 16 40
(Rs.) 500000-1500000 14 35
1500000-2500000 5 12.5
Above 2500000 5 12.5
Source: SPSS output and the Author
Out of 40 respondents, 55% were male and 45% were female.
More than 90% had achieved their Bachelor’s degree and over. Therefore, respondents were
catogrised as highly qualified.
About 40% had invested in the capital market below Rs. 500000. Thirty-five percent had investment
between Rs. 500000 to Rs. 150000, and 25% had an investment of more than Rs. 1500000.
Table 4: Age of Respondent

Valid 40
N
Missing 0
Mean 33.58
Source: SPSS Output
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Mean age of respondent was 33 years old, where the participated respondent age varied from 27 to
41 years.

4.1.2 Respondents Knowledge on Capital Market

Table 5: Known about Capital Market

Respondents Employer and Sector

SEBON/ Bank/ Lecturer/ Corporate
  NEPSE Finance Govt. Broker student house Total Percent
know about Yes 4 14 2 2 7 4 33 82.5
Capital
market No 0 2 0 1 0 0 3 7.5
some how 4 0 0 0 0 0 4 10
Total 8 16 2 3 7 4 40 100
Source: SPSS output and the Author
More than 82% of respondent had known capital market but 3 out of 40 had no knowledge of capital
market and 4 had some general knowledge about capital market. It is surprised to see 3 person who
do not know about the capital market were from brokers and bank/finance sector which is actually
the sensitive sector dealing with capital market.

Table 6: Capital Market helps to invest in Security liked

Respondents Employer and Sector

SEBON/ Bank/ Lecturer/ Corporate
  NEPSE Finance Govt. Broker student house Total Percent
Capital
market helps Yes 2 9 2 3 6 4 26 65
to invest in
security liked No 6 7 0 0 1 0 14 35

Total 8 16 2 3 7 4 40 100
Source: SPSS output and the Author
Sixty-five percent respondents believed that capital market had helped to invest in the securities they
liked. The respondent who expressed that capital market does not help to invest in their liked
securities is from SEBON/NEPSE (75%) and Bank/Finance sector (44%).

Table 7: Development of Capital Market in Nepal

Respondents Employer and Sector

SEBON/ Bank/ Lecturer/ Corporate
  NEPSE Finance Govt. Broker student house Total Percent
development
of Capital very satisfied 4 9 2 0 1 0 16 40
Market in
Nepal Satisfied 2 0 0 3 0 0 5 12.5
Average 2 3 0 0 6 1 12 30
Dissatisfied 0 4 0 0 0 3 7 17.5
Total 8 16 2 3 7 4 40 100
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Source: SPSS output and the Author
More than one third respondent (82%) expressed Nepalese capital market has developed averagely
out of them 40% were very satisfied with capital market developed so far while 17.5 % were
dissatisfied with its development. 4 respondents were from Bank/Finance and 3 were from Corporate
house.

Table 8: Major problems of Capital Market

Respondents Employer and Sector

SEBON/ Bank/ Lecturer/ Corporate
  NEPSE Finance Govt. Broker student house Total Percent
the major small capital
problems of market 2 7 0 1 0 0 10 25
Capital lack of
market investor’s
confidence 0 3 2 2 3 4 14 35
lack of co-
ordination
between
monitoring
bodies 2 3 0 0 4 0 9 22.5
restriction of
foreign
investors 4 3 0 0 0 0 7 17.5
Total 8 16 2 3 7 4 40 100
Source: SPSS output and the Author
Regarding the problem of capital market there was mixed response. Thirty five percent of respondent
had expressed lack of investor’s confidence is a major problem of capital market. Almost similar
percent thinks small capital market and lack of co-ordination between monitoring bodies are the
major problem of Nepalese capital market.

Table 9: Types of Market Invested

Respondents Employer and Sector

SEBON/ Bank/ Lecturer/ Corporate
  NEPSE Finance Govt. Broker student house Total Percent
types of primary market 2 2 0 0 0 0 4 10
market secondary
invested market 6 13 2 1 6 4 32 80
Both 0 1 0 2 1 0 4 10
Total 8 16 2 3 7 4 40 100
Source: SPSS output and the Author
Eighty percent of respondent had invested in the secondary market while just 10% had invested in
both markets, with same percentage invested in primary market. Thirteen respondents from the
bank/finance sector were the major portion to invest in secondary market. Two respondents from
SEBON/ NEPSE and Bank/ Finance each had invested in primary market.

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Table 10: Types of Security Invested

Respondents Employer and Sector

SEBON/ Bank/ Lecturer/ Corporate
  NEPSE Finance Govt. Broker student house Total Percent
Types of Shares 2 15 2 1 4 3 27 67.5
security
invested corporate bonds 0 1 0 0 0 0 1 2.5
government
bonds 0 0 0 1 0 0 1 2.5
shares and
corporate bonds 6 0 0 1 3 1 11 27.5
Total 8 16 2 3 7 4 40 100
Source: SPSS output and the Author
More than 67% respondent had invested in shares and about 28% had invested in shares and
corporate bonds. Very few respondents had invested in Government bond and corporate bond.

Table 11: Objectives for Investment and Achievement of Objectives

Respondents Employer and Sector

SEBON/ Bank/ Lecturer/ Corporate
  NEPSE Finance Govt. Broker student house Total Percent
objectives for Interest 4 7 0 1 0 1 13 32.5
investment
Dividend 4 3 0 0 3 3 13 32.5
capital growth 0 6 2 2 4 0 14 35
Total   8 16 2 3 7 4 40 100
    Respondents Employer and Sector Total
SEBON/ Bank/ Lecturer/ Corporate
    NEPSE Finance Govt. Broker student house   Percent
objectives
achieved by Yes 8 12 2 1 7 1 31 77.5
investing in
capital
market No 0 4 0 2 0 3 9 22.5

Total   8 16 2 3 7 4 40 100
Source: SPSS output and the Author

Regarding the objectives of investment there was mixed response, as they had equal preference to
interest, dividend and capital growth. Respondent from SEBON/NEPSE had preferred for interest
and dividend where more than 50% respondent of Lecturer/ Student sector prefers capital gain and
dividend.
More than 77% of respondents had achieved their objectives by investing in capital market. Out of
22% who did not achieve their objectives are mainly from brokers (66%) and corporate house (75%).

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Table 12: Types of Security to invest in Future

Respondents Employer and Sector

SEBON/ Bank/ Lecturer/ Corporate
  NEPSE Finance Govt. Broker student house Total Percent
type of
security to Shares 5 10 2 2 5 2 26 65
invest if corporate
opportunities bonds 2 5 0 1 2 0 10 25
are available Others 1 1 0 0 0 2 4 10

Total 8 16 2 3 7 4 40 100
Source: SPSS output and the Author
Without any doubt, 65% of the respondents were eager to invest in share if any further investments
are available. More than 50% of respondent of each sector were interested to invest in shares.

4.1.3 Respondent Knowledge of Investment and Stability

Table 13: Evaluation of Investment in Stock Market

Respondents Employer and Sector

SEBON/ Bank/ Lecturer/ Corporate
  NEPSE Finance Govt. Broker student house Total Percent
Evaluation of very secure 6 8 2 1 3 1 21 52.5
investment in
stock market Secure 0 5 0 1 4 0 10 25
not secure 0 0 0 1 0 0 1 2.5
don't know 2 3 0 0 0 3 8 20
Total 8 16 2 3 7 4 40 100
Source: SPSS output and the Author
Almost 78% of respondent had expressed that their investment are secure where eight respondents
cannot evaluate whether it is secure or not. Just one respondent from broker sector had experienced it
was not secure.

Table 14: Secure Sector in Term of Returns and Price Stability

Respondents Employer and Sector

SEBON/ Bank/ Lecturer/ Corporate
  NEPSE Finance Govt. Broker student house Total Percent
more commercial
secure bank 2 8 2 1 7 1 21 52.5
sector in development 0 2 0 1 0 3 6 15
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term of bank
returns and
Hotels 6 1 0 1 0 0 8 20
price
stability manufacturing
and processing 0 5 0 0 0 0 5 12.5
Total 8 16 2 3 7 4 40 100
Source: SPSS output and the Author

Regarding, more secure sector more that 50% had expressed commercial bank as secured sector.
Twenty percent had expressed hotels as secured sector followed by development banks, and
manufacturing & processing. Majority respondent from SEBON/ NEPSE had expressed hotel as a
secure sector while respondent from bank/finance expressed commercial bank as a secure sector to
invest.

Table 15: Factors needed to considered while making Investment Decision

Respondents Employer and Sector

SEBON/ Bank/ Lecturer/ Corporate
  NEPSE Finance Govt. Broker student house Total Percent
factors profitability
should be and dividend
considered policy 4 1 0 0 3 4 12 30
while future
making prospectus 0 2 2 0 3 0 7 17.5
investment corporate
decision governance 0 3 0 1 0 0 4 10
financial
stability 4 10 0 2 1 0 17 42.5
Total 8 16 2 3 7 4 40 100
Source: SPSS output and the Author

Respondent expressed that the financial stability should be considered while making investment
decision, among 40 respondent 30% had preferred to profitability and dividend policy. They were
also interested to invest in where future prospectus of a company is visible. Over that, 43% had
expressed financial stability as a major factor while considering investment decision.

Table 16: Reaction towards news of Government Agencies to invest in Capital Market

Respondents Employer and Sector

SEBON/ Bank/ Lecturer/ Corporate
  NEPSE Finance Govt. Broker student house Total Percent
reaction Satisfied 6 4 2 1 3 1 17 42.5
towards news
of Government Average 2 8 0 2 0 3 15 37.5
Agencies to   0 4 0 0 4 0 8 20

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invest in
Capital market Dissatisfied
Total 8 16 2 3 7 4 40 100
Source: SPSS output and the Author

Regarding to the news of government agencies to invest in capital market about 42% reacted they
were satisfied and 38% reacted they were average not satisfied nor dissatisfied. Who had expressed
dissatisfaction was from Bank/ Finance and Lecturer/ Student, while respondent from
SEBON/NEPSE, more than (75%) expressed they were satisfied with the news.

Table 17: CDS will improve Capital Market Activity and Boost Investor’s Confidence

    Respondents Employer and Sector

SEBON/ Bank/ Lecturer/ Corporate
    NEPSE Finance Govt. Broker student house Total Percent
CDS will improve Yes 6 5 2 1 7 3 24 82.5
Capital Market
activity No 0 8 0 1 0 1 10 7.5
don't
know 2 3 0 1 0 0 6 10
Total   8 16 2 3 7 4 40 100
    Respondents Employer and Sector
SEBON/ Bank/ Lecturer/ Corporate
    NEPSE Finance Govt. Broker student house Total Percent
CDS will boost Yes 6 9 2 1 3 4 25 62.5
investor's
confidence No 0 5 0 2 1 0 8 20
don't
know 2 2 0 0 3 0 7 17.5
Total   8 16 2 3 7 4 40 100
Source: SPSS output and the Author
Regarding CDS, the infrastructure development 82.5% believed that it could improve capital market
activity and same time about 63% expressed that CDS will boost investor’s confidence. Very few
had expressed that CDS will not improve capital market activity were from SEBON/ NEPSE, Bank/
Finance and broker. Out of eight respondents who were against CDS to boost investor’s confidence
were from bank/finance sector (31%), broker (67%), and lecturer/ student (14%).
Table 18: Market maker has helped to stabilize the Share Price

Respondents Employer and Sector

SEBON/ Bank/ Lecturer/ Corporate
  NEPSE Finance Govt. Broker student house Total Percent
Market
maker has Yes 0 4 0 1 0 1 6 15
helped to
stabilize the
share price No 8 12 2 2 7 3 34 85
Total 8 16 2 3 7 4 40 100
Table 19: Stability to Nepalese Capital Market-by-Market makers
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 Respondents Employer and Sector
SEBON/ Bank/ Lecturer/ Corporate
  NEPSE Finance Govt. Broker student house Total Percent
Stability to strongly
Nepalese Capital agree 4 4 0 0 0 0 8 20
market by
Agree 2 7 2 3 4 1 19 47.5
Market makers
strongly
disagree 0 2 0 0 0 0 2 5
Disagree 2 3 0 0 3 3 11 27.5
Total 8 16 2 3 7 4 40 100
Source: SPSS output and the Author.
Regarding question about market makers majority (Table 18 and 19) had expressed that they cannot
stabilize the share price but more than 67% hope that market maker can give stability to Nepalese
Capital Market. Out of eight respondents from SEBON/ NEPSE are against market makers about
share price stability but four of them had strongly agreed that it can give stability to Nepalese capital
market. Respondent of bank/finance, majority of 75% did not agree that market maker had stabilized
the share price but more that 68% had expressed market maker can stabilize the capital market.

4.1.4 Respondent Knowledge on Impact of Signalling Factor

Table 20: Factors for the NEPSE index Drift

Respondents Employer and Sector

SEBON/ Bank/ Lecturer/ Corporate
  NEPSE Finance Govt. Broker student house Total Percent
factor for political
the NEPSE instability 0 2 2 1 0 0 5 12.5
index drift rules and
regulation 0 5 0 2 3 0 10 25
company's news/
announcement 0 1 0 0 0 0 1 2.5
Others 8 7 0 0 4 1 20 50
don't know 0 1 0 0 0 3 4 10
Total 8 16 2 3 7 4 40 100
Source: SPSS output and the Author
With a little surprise, about 50% of respondent said that others factor is the main reason for NEPSE
index to drift but had not expressed any specific factor. Just five respondents (12.5%) had expressed
political instability as a major factor. Twenty-five percent had expressed company’s news and
announcement is the main factor for NEPSE index drift.

Table 21: Factor that will awake Share Price

Respondents Employer and Sector

SEBON/ Bank/ Lecturer/ Corporate
  NEPSE Finance Govt. Broker student house Total Percent
factor that political 0 4 0 1 5 3 13 32.5
will awake stability
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share price rules and
regulation 0 1 0 2 0 1 4 10
company's
news/announ
cement 8 9 2 0 1 0 20 50

Others 0 2 0 0 1 0 3 7.5
Total 8 16 2 3 7 4 40 100
Source: SPSS output and the Author

Regarding to awake share price of stock 50% of respondent expressed it as company’s news and
announcement and about 33% believed political stability is the factor to awake share price. Out of 40
respondents, just three believed that other factor that will awake share price.

Table 22: Share Price Plunged more sharply

Respondents Employer and Sector

SEBON/ Bank/ Lecturer/ Corporate
  NEPSE Finance Govt. Broker student house Total Percent
share price political
plunged instability 0 0 0 2 1 0 3 7.5
more rules and
sharply regulation 8 8 2 0 0 3 21 52.5
Others 0 8 0 1 6 1 16 40
Total   8 16 2 3 7 4 40 100
Source: SPSS output and the Author
Regarding experience of sharp plunged on share price more that 52% said it is because of rules and
regulations where just 8% said it is because of political instability. About 40% believed, that it is
others factors. Respondent who participated from SEBON/ NEPSE all (100%) had experienced that
share price had plunged more sharply when there was any changes in rules and regulation.

4.2 Findings of Open Ended Questionnaire

Research question one of this research is to investigate the present state and status of the present
Nepalese capital market. To fulfil this, an open-ended questionnaire is used (see appendix R)
A summary of the result are listed below.

1. Currently Nepal’s capital market is in the developing phase so there are many areas where it can
focus for its systematic development. Many regulations have been formulated to support the
current Nepalese capital market however uncertain political condition, limited user group and
lack of implementation about the tools and technique had forced capital market as not promising
as it has to be.

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2. In terms of control and pricing, the secondary market is very unpredictable. It has been compared
with a “fish market where big players gain and small players are still in wait.”
3. Nepal Stock Exchange development is in very slow stage. As they have introduced CDS and
Mutual Fund, implementation part is still in process. However, Regulatory board are intending to
make it more accessible for all investors.
4. The major economic activity of the country focuses upon the service sector. In same context,
Banking is moreover systematic and the risk in investing in bank is least in comparison to others.
Because of investor confidence level is very high in BFI
5. The major role of the Government of Nepal to take all sectors as equal preference and
systemization of the sectors is the only measure to initiate the inclusion of the other sectors into
capital market. However, this could not be done until “stable government comes with strict
policies that will boost stakeholder’s confidence”. Once it has done then there is lot of potential
for other company to come forward in the capital market.
6. CDS duly does reduce the manual exertion; however, it also creates new opportunities to for
innovation and techniques. It helps through creation of the platform for the investment.
7. In the financial term, “demand and supply of the financial instruments in the stock market defines
the basic pricing of the stock”. The entity’s performance currently has very less impact on the
prices. However, major impact is hit by the “political embargo of the country, which majorly
disrupts the system of the stock exchange.
8. The investors are currently in jeopardy to invest due to absence of the return in the market. Big
players of the market have secured their investments but the others are keeping their money
dislodged at home.” Sense of insecurity and instability has discouraged the investors”. They are
still in wait and watch situation.
9. Awareness (proper understanding and guidelines) about the capital market is only the way to
attract investors. GoN shall act upon creation of the new horizon of the investment in the country
and it should not be limited to Kathmandu valley.
10.CDS and Mutual Funds shall provide improved transacting of the capital market that would ease
the investors to study and invest in the market. However, the implementation part is always a
problem in Nepal. Moreover, it shall provide the base of improvement of the market.
11.If scenario changes in Nepal i.e. Political embargo and instability in the country is kept away
from the stock market as practicable as possible the Future of the Nepal Stock Market has very
potential. There is many more to happen in this area.
12.Nepal seeks opportunities in this field for improvement but due to the political influence level of
the country, every sector has been pressed into its premature state. For every sector to enhance
their capacity they suggest the leaders, current and future, shall keep eye over it.

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4.3 Findings of Secondary Data
4.3.1 Hypothesis 1
4.3.1.1 Karl Pearson’s Coefficient co-relation
Karl Pearson's Correlation Coefficient (r) between traded and listed companies is 0.970985, highly
positive correlated.
Table 23: Karl Pearson’s Coefficient co-relation

  listed companies r2 P.E. 6P.E.

listed companies 1  
Traded companies 0.970985153 0.942812168 0.017250518 0.103503106
Source: Ms Excel output

Since, listed and traded companies’ shows a significant relationship as ‘r’ is greater than 6 P.E.
i.e. r = 0.970985153 > 0.103503106 = P.E. (Table 23).

4.3.2 Objective 1
4.3.2.1 Ratio Analysis
Measuring Size and Liquidity
Size of the securities market can be measured in term of market capitalization to GDP. It has an
increased trend until 2008/09 but after it decreased in 2009/10. It maintains to increase in 2010/11
where market capitalization has decreased. Due to drastic decrease in GDP however, MCR has
reached to highest of 59% during study period

Table 24: Market Size and Liquidity

(Rs.in million)
Fiscal GDP at Current Market Turnover MCR ML
Year price level Capitalization

2006/07 728178.00 186301.13 8360.1 0.256 0.011

2007/08 815663.20 366247.5 22820 0.449 0.028
2008/09 991316.10 512939.07 21681.14 0.517 0.022
2009/10 1182680.10 376871.37 11851.11 0.319 0.010
2010/11 548484.70 323484.34 6665.33 0.590 0.012
Source: NEPSE Annual Report, 2006/07 – 2010/11, and the Author.

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Turnover has a fluctuating trend. FY 2007/08 has witnessed the best TOR, then after it started to
decrease. Almost decreasing to half figure on both GDP and turnover in FY 2010/11 comparing to
previous FY, ML has increased by very nominal percentage (Table 23).
4.3.2.3 Growth Analysis
Public Issue Approval and Amount
The number of public issue approval of the companies remains fluctuating. It shows an increasing
trend from FYs 2005/2006 to 2007/2008, and fluctuating the following years, which were just 16 in
FY 2010/11 decreased by 57% on year on year basis. However, the empirical result reveals that the
overall growth rate of number of companies issue approval was 21% during the study period.
Table 25: Public Issue and Amount

(Amount in million)
Issued Number Issued Amount
Number Annual Overall Amount Annual Overall
Growth Growth Growth Growth
2005/06 5     390.5    
2006/07 16 220%   940.3 141%  
2007/08 18 13%   1340.2 43%  
2008/09 11 -39%   2509.76 87%  
2009/10 37 236%   3144.7 25%  
2010/11 16 -57% 21% 2028.44 -35% 32%
Source: SEBON Annual Report (2005/06 – 2010/11) and the Author
The amount of issue approval shows ups and downs during the study period. In the 2005/2006 to
2009/2010, the growth rate on yearly basis is positive with highest amount approval of Rs.3144.7
million in 2009/2010.
The amount of issue approval indicates an attractive growth trend from FY 2005/2006 to 2009/2010.
The study found that the overall growth rate of public issue approval amount is 32 percent (Table 24)
Number of Listed and Traded Securities
The percentage of traded securities over listed securities ranged from 14% to 29% during the study
period. Similarly, the overall growth rates of listed and traded securities are 29% and 14%.

Table 26: Number of Listed and Traded Securities

(Amount in million)
Number of Listed Securities Number of Traded Securities
Number Annual Overall Amount Annual Overall
Growth Growth Growth Growth
2005/06 226540     12221.93    
2006/07 243504 7%   18147.25 48%  
2007/08 321131 32%   28599.77 58%  
2008/09 637868 99%   30547.16 7%  

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2009/10 821746 29%   26231.35 -14%  
2010/11 1033674 26% 29% 26240.39 0% 14%
Source: SEBON Annual Report (2005/06 – 2010/11) and the Author
Number of Transaction and Annual Turnover
The number of annual transactions shows increasing trend during the study period. It has increased
from around 97 thousands to 103 thousands. The highest growth rate (39%) took place in 2008/09.
However, the overall growth rate during the study period was 25 %.
Table 27: Number of Transaction and Annual Turnover

(Amount in million)
Number of Transaction Annual Turnover
Number Annual Overall Amount Annual Overall
Growth Growth Growth Growth
2005/06 97374     3451.4    
2006/07 120510 24%   8360.1 142%  
2007/08 150800 25%   22820 173%  
2008/09 209091 39%   21681.14 -5%  
2009/10 213733 2%   11851.11 -45%  
2010/11 302364 41% 21% 6665.33 -44% 12%
Source: SEBON Annual Report (2005/06 – 2010/11) and the Author
Annual turnover in stock exchange has fluctuated between Rs.8360.1 million to Rs.21681.14 million
in the past five FYs. The growth rate of annual turnover is 12 % over the observed period. The
percentage of turnover on paid up value has fluctuated between highly. As such, the increasing trend
in number of transactions implies the higher liquidity and attractiveness in securities, but decrease
trend after 2007/2008 on annual turnover indicate unattractiveness in securities (Table 27)
Paid up Value and Market capitalization
The amount of paid up capital has increased in every subsequent FYs. However, the annual growth
rate has not increased in the same ratio. Paid up capital of overall listed securities has increased from
Rs. 21798.8 million in 2006/2007 to Rs.100238 million at the end of 2010/2011.
Table 28: Paid up Value and Market Capitalization

(Amount in million)
Paid up Value Market Capitalization
Amount Annual Growth Overall Growth Amount Annual Growth Overall Growth

2005/06 19958     96763.70    

2006/07 21798.8 9%   186301.30 93%  
2007/08 29465 35%   366247.5 97%  
2008/09 61140 108%   512939.07 40%  
2009/10 79356 30%   378871.37 -26%  
2010/11 100238 26% 31% 323484.34 -15% 22%
Source: SEBON Annual Report (2005/06 – 2010/11) and the Author

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The overall growth rate is 31 % over the observed period. This indicates the pace of investment in
corporate sector through securities is hiking up.
The market capitalization based on closing market price of listed securities was worth of Rs.
186301.3 million in 2006/2007. The overall growth rate of the market capitalization during the study
period was 22% where capital had lost 134067.7 million during single FY in 2009/2010(Table 28)
Security Businessperson
In the FY 2006/2007, there were altogether 33 securities businesspersons that increased to 52 an
overall growth of 8%.
Table 29: Security Businessperson

Security Businessperson*
Number Annual Growth Overall growth
2005/06 33    
2006/07 33 0%  
2007/08 32 -3%  
2008/09 40 25%  
2009/10 34 -15%  
2010/11 52 53% 8%
Source: SEBON Annual Report (2005/06 – 2010/11) and the Author
* includes brokers and merchant banks
In the total number of securities businesspersons, stockbrokers dominate more than 74% over the
study period (Table 29).

4.3.3 Objective 2

4.3.3.1 Risky Sector

Commercial bank index had followed the same trend as Sensitive Index (SENEX). SENEX shows
the systematic risk which can be compared to the other sector to evaluate riskiness of other sector.
Table 30: Analysis of Sector wise Sensitivity Index

Data are based on Fiscal Year ended Base year (17 July 2006) = 100
Year Commercial Development Insurance Hydro Finance M&P* Sensitivity
Bank Bank power Index

2006/07 181.07 196.64 113.18 153 160.74 136 175.08

2007/08 241.41 248.05 270.63 254.23 434.44 164.00 253.72
2008/09 200.16 162.44 201.80 210.94 213.03 170.00 198.77
2009/10 114.08 109.68 174.57 167.64 139.65 172.80 119.32
2010/11 82.52 75.58 115.31 122.28 83.87 191.24 89.44
Source: NEPSE Annual Report, 2006/07 – 2010/11
Note: M&P (Manufacturing and Processing)

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Figure 6: Analysis of Sector wise Sensitivity Index

Source: Table 30 and the Author

Therefore, from the above analysis it can be viewed that the systematic risk of the commercial bank
is same as the market and likelihood of effects is positively related. On the other hand, finance sector
index is more volatile and fluctuated more than other sector, showing clear picture that this sector is
more risky.
Increasing trend has witnessed all in a good shape but while its sleeping from the ultimate high point
on 2007/2008, then it is clear that Development Bank had been affected most followed by the
financial sector. Hydropower and Commercial Bank had almost the same pattern of movement,
however it is surprising to see the increasing trend of the manufacturing & processing sector had not
been affected and is in more relaxed compare to others.

4.3.4 Hypothesis 2

4.3.4.1 Signalling Factor

It is clear that paired t-test (two tail) tabulated value at 16 degree of freedom at 5% level of
significance is  2.1199 (t-critical value) and t stat values are 0.055, -0.213, -0.0502, 0.0837, and
-0.0950 respectively for five major events taken into consideration. (See appendix J to N)

Table 31: Result of Signalling Factor

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 S. No. Year Signalling Factor t-stat t - Critical at 16 d.f. Conclusion
Null
( 5% level of significant ) Hypothesis
December
SF 1 24, 2007 End of Monarchy 0.0553 ± 2.1199 Do not reject
August Coalition government
SF 2 16,2008 lead by Maoist Leader -0.0213 ± 2.1199 Do not reject
May Resignation of First
SF 3 23,2009 Prime Minister -0.0502 ± 2.1199 Do not reject
Constituent Assembly
fails to meet for
May drawing up new
SF 4 28,2011 constitution 0.0837 ± 2.1199 Do not reject
July Capital gain tax reduced
SF 5 15,2011 to 5% from 10% -0.0950 ± 2.1199 Do not reject
Source: Ms Excel Output and the Author
Political and new rules of government factor that analysed in this research do not reject null
hypothesis, simply there was not any significant difference between NEPSE index before and after.

4.3.5 Hypothesis 3
4.3.5.1 Run Test
The below table 32 provides an evidence that all sample company had rejected the null hypothesis in
daily run test, i.e. the successive price changes are independent and accepted the alternative
hypothesis instead.
Comparing to daily run test monthly run test has slightly different result. As from the analysis
Himalayan General, Insurance, and Chilime Hydropower have accepted the null hypothesis, i.e.
successive price are independent
Overall 89% of total sample have rejected the null hypothesis. (see table 32 and 33)(See appendix S
and T)

4.3.6 Objective 3 and 4

Objectives 3 and 4 of this research are highly influenced by the hypothesis 2 and 3 respectively.
Therefore, the outcome of hypothesis has been analysed to answer these objectives.

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4.3.5.1.1 Daily Price Run Test
Table 32: Daily Price Run Test (01/01/2012 – 13/09/2012)

Commercial Developmen Finance Insurance Hotel Manufacturing Trading Other Hydropower

Bank t Bank Company Company & Processing Company Company

Standard Ace Nepal Himalayan Soaltee Unilever Nepal Bishal Nepal Chilime
Chartered Developmen Finance General & Hotel Ltd Bazar Doorsanchar Hydropower
Bank t Bank Ltd Insurance Ltd Ltd Ltd
Mean 1782.8 127.4 111.7 186.5 238.6 6914 1957.9 500.7 876.3

R 20 7 2 2 5 2 2 12 14
n0 59 44 11 5 30 16 6 60 61
n1 53 35 18 6 14 9 9 45 51
N 112 79 29 11 44 25 15 105 112
E(R) 56.839 39.987 14.655 6.455 20.091 12.520 8.200 52.429 56.554
Var( R ) 27.587 18.988 6.172 2.430 8.032 5.050 3.189 24.937 27.303
StDev ( R ) 5.252 4.357 2.484 1.559 2.834 2.247 1.786 4.994 5.225
Z( R ) -7.014 -7.570 -5.094 -2.858 -5.325 -4.682 -3.472 -8.096 -8.144
p-value 0.000 0.00 0.00 0.00 0.00 0.000 0.00 0.00 0.00
Decision Reject Reject reject reject reject reject reject Reject reject
Source: NEPSE Database, Ms Excel and the Author

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4.3.5.1.2 Monthly Price Run Test
Table 33: Monthly Price Run Test (Jun/Jul 2011 – Jul/Aug 2012)

Commercial Developmen Finance Insurance Hotel Manufacturing Trading Other Hydropower

Bank t Bank Company Company & Processing Company Company

Standard Ace Nepal Himalayan Soaltee Unilever Nepal Bishal Nepal Chilime
Chartered Developmen Finance General & Hotel Ltd Bazar Doorsanchar Hydropower
Bank t Bank Ltd Insurance Ltd Ltd Ltd
Mean 1558.357 123.07 145.14 198.9 195.9 5870.9 2408.2 443.1 782.8

R 3 4 2 5 3 4 2 4 7
n0 8 8 7 4 7 6 7 9 6
n1 6 6 7 10 7 8 7 5 8
N 14 14 14 14 14 14 14 14 14
E(R) 7.857 7.857 8.000 6.714 8.000 7.857 8.000 7.429 7.857
Var( R ) 3.089 3.089 3.231 2.072 3.231 3.089 3.231 2.684 3.089
StDev (R) 1.758 1.758 1.797 1.440 1.797 1.758 1.797 1.638 1.758
Z( R ) -2.763 -2.194 -3.338 -1.191 -2.782 -2.194 -3.338 -2.093 -0.488
p-value 0.00 0.01 0.00 0.12 0.00 0.01 0.00 0.02 0.31
Decision reject reject reject accept reject reject reject reject accept

Source: NEPSE Database, Ms Excel and the Author

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Chapter 5: Analysis/ Discussion of Findings

It was made clear in the methodology chapter that hypothesis and objectives were established to
justify the aims of this research, to explore whether in real sense capital market has developed since
FY 2006/07 or not and to link the share price behaviour theories to the changing scenario.
To make it more accessible both primary findings (open-ended) and secondary findings are analysed
simultaneously.

5.1 Development and present situation

Hypothesis 1, objectives 1, 2 and 3 had provided the evidence for first part of the research aim.
Hypothesis 1 has sufficient evidence to prove that capital market of Nepal has developed since
2006/07. The model used, Karl Pearson’s correlation coefficient has strong positive relationship and
the probability error shows significant at 5%.
Finding is similar with findings of Gurung (2004: p 88) where he explained there is a growth in a
market
To define the objective 1 two different approaches had been adopted i.e. ratio analysis and growth
analysis.
It was mentioned in previous chapter that capital market size could be measure from market
capitalization ratio. Market capitalization is positively correlated with the ability to mobilize capital
and diversify risk on an economy wide basis. This is the ratio of aggregate market value of the listed
shares to GDP. It is, on an average, is around 43 percent during the observed period. It has fluctuated
in the range of 25 to 59 percent. In developing countries, it is in between 20 and 40 percent (K.C.
2010: p 81). All these facts imply that the capital market in Nepal has developed so far.
There are two major components to measure market liquidity, where as this research uses annual
turnovers of the stock market and GDP. The ratio of the value of shares traded to GDP is between
0.010 and 0.028 percent. During the study period, the value of shares traded accounted, on an
average, remains about 0.01 percent of GDP. In developed capital market, this figure is as high as 40
percent and in developing countries; it varies in the range 5 to 10 percent of GDP (K.C. 2010: p 83).
Therefore, from the calculation it can be concluded that the liquidity position has improved.
Low ratio of market liquidity represents trading in equity to the size of economy is very low in
Nepal and does not support the view of development of capital market in Nepal.
Other indicator used to define growth of capital market like public issue and amount, number of
listed and traded securities, number of transaction, annual turnover, paid up value, market

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capitalization and security businessperson, had increased (see appendix B). Therefore, on basis of
increment percentage it can be argued, Capital Market has been developed.
Similarly, if infrastructure is to be taken as minimum criteria of development as explained by
Obiakor and Okwu, (2011: p 90) then also it can be argued that Nepalese capital market has
developed. For example establishment of CDS, new registration of Mutual Funds, policies feverish
to attract Non-Residential Nepalese Investment etc.

Table 34: Growth of Financial Institutions

Types of Financial Institutions Mid - July

  2006 2007 2008 2009 2010 2011
Commercial Bank 18 20 25 26 27 31
Development Bank 28 58 58 63 79 87
Finance Companies 70 78 78 77 79 79
Micro-Finance Development Bank 11 12 12 15 18 21
Savings & Credit Co-operatives (Limited
Banking Activities) 19 16 16 16 15 16
NGO's (Financial Intermediaries) 47 46 46 45 45 38
Total 193 230 235 242 263 272
Source: NRB, Banking and Financial Statistics, No.57, July 2011 (p. 2)
Another important indicator to measure development of capital market in the sense of financial
sector development Paramati and Gupta (2010: p 137) also shows that number of Bank and
Financial Institution (BFI) has increased year by year and account 75% of total listed companies in
year 2010/11 (Table 34).
Primary data also shows that Nepalese capital market had developed, but little variance was observed
in close-ended questionnaire. It showed that Nepalese capital market is still in developing stage,
however, introduction of CDS and mutual funds will definitely boost investor’s confidence.

5.2 Risky Sector

Objective 2 of this research is to examine risky sector. This objective has been met by the primary
analysis and secondary data analysis.
In close-ended questionnaire, none of the respondent has selected finance sector as a secure sector
for investment however, results shows that commercial bank sector is the most secure sector to
investment. This result can be denied from the secondary data analysis. In secondary data,
Manufacturing & Processing sector is more secure than commercial bank, because it has an
increasing trend and not effected by any situation. Secondary data analysis found that finance sector
is more risky than other sector. It has the most fluctuating trend. In year 2007/08, sensitive index
(SENEX) of finance sector had reached to 432.44 points and dropped rapidly to 83.37 points.

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Other risky sector pointed out from secondary data is Development Bank sector. It follows the same
pattern as SENEX but plunged more in year 2008/09 and dropped lower that the benchmarking index
in consecutive two year.
The findings of primary data analysis are similar with Kadariya (2012: p 56), where he mentioned
that commercial bank as a secure sector.
Findings of secondary data are supported by the fact when Nepal Rastra Bank (NRB) 5 decided to
liquidate Nepal Development Bank, United Development Bank, and Samjhana Finance Company.
 NRB decided to liquidate Nepal Development Bank on 2 nd June 2009
(The Republica, 2009-06-03).
 On March 29, 2011, NRB decided to liquidate Samjhana Finance Company (30 March
2011). The Kathmandu Post (2011 c)
 Recently, on March 2012, NRB has decided to liquidate United Development Bank (29
March 2012). The Kathmandu Post (2011 g)
Further, above result was supported by Gurkha Development Bank. Crisis ridden Gurkha
Development Bank has halted deposit withdrawal for the time being. Officials said the bank
branches would remain closed for the next few days as they are working on fund management. (30
April 2011). The Kathmandu Post (2011 b).

5.3 Signalling Factor

Hypothesis 2 and objective 3 was formed to investigate the signalling factor that effect NEPSE
index.
Result obtained from hypothesis 2 provides sufficient evidence not to reject null hypothesis i.e. there
is no difference between NEPSE index before and after signalling factor. Four variables as political
and one variable as new rules and regulation of government had been analysed. Thus, political factor
and new rules of government is not the factor that influenced the NEPSE index.
Primary data revealed mixed response regarding NEPSE index. Just 33% believed that it is because
of political instability (Table. 21). Somehow, the findings of primary data analysis support the
findings of secondary data analysis on the fact that political factor is not the primary reason to effect
NEPSE index.
Above finding can be verified by Nepal’s Daily English Newspaper articles.
Box 1: The Himalayan Times

NEPSE plunges below 300 points

2011-06-14
Lack of investor’s confidence, poor economic performance, government’s apathy towards the
capital market and recent ‘ crisis’ in some of the bank and financial institutions have
5
Central Bank of Nepal.
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contributed to the continuous fall in the secondary market index.

Source: The Himalayan Times

Box 2: The Kathmandu Post

NEPSE rallies on peace process progress

2011-10-09
“…unlike developed markets where political changes make a direct impact on the stock
market, Nepal’s experience has been mixed. Against all expectations, the stock market
reacted positively when former King Gyanendra Shah took over absolute control of the
government on February, 2005”. (The Kathmandu Post, 2011 e)

Despite measure, investors lose Rs.21.67b in Q1

2011-10-09
The market plunged to the lowest to 313.37 points on September 19, 2011 and started to rise
again. Currently, the market is more or less stable. Stock analysts say the ongoing liquidity
crunch, high interest rate, political instability and sluggishness in the economy are some of
the key factors affecting the stock market. (The Kathmandu Post, 2011 d)

Capital market in first Quartet: Stock in doldrums despite fervent measure

2011-11-01

A liquidity crunch in the banking system last year was cited as one of the reasons behind the
slowdown in the stock market. Now, despite the liquidity situation having improved
considerably, the stock market is still in bearish mode.  Stockbrokers have blamed high
interest rates for the sluggish trend in the stock market. “Though banks now have excess
liquidity, they have not cut interest rates,” said one stockbroker. “Unless the return from
stocks is higher than from bank deposits, investors will not be eager to invest in shares.”
(The Kathmandu Post, 2011 f)

Stagnancy continues in NEPSE

2011-08-14
After the government and the Nepal Rastra Bank took some measures, including reduction in
capital gain tax and relaxation in margin lending, it was expected that the market would
witness a bullish run, but that has not happened. (The Kathmandu Post, 2011 g)

Source: The Kathmandu Post

Box 3: The Republica

NEPSE ends the year on a positive note despite political instability

2012-07-17

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Country´s stock market recorded impressive rise of 26.87 points or 7.71 percent over fiscal
year 2010/11 to close at 389.72 points, thanks to some positive economic indicators and
marginal drop in lending rates of banks and financial institutions.
“The capital market showed some positive improvements backed by lower bank interest rates
and some positive indicators of the economy despite the lingering political instability,”
Rabindra Bhattarai, a share analyst, told Republica.
Bank interest rate declined by around 2 percentage points to about 14 percent during the year.
Similarly, economic growth also rose to 4.6 percent.
Though the government attempted to improve share trading by easing margin lending, it
failed to boost investors´ confidence amid deepening uncertainty over promulgation of new
constitutions in the country.

Source: Financial Nepal.com

Previous section answered research question one and the following will answer the second research
question, which is establish to deal with second part of research aims.
To answer this question hypothesis 3 and objectives 4 were formed.

5.4 Market Efficiency

Hypothesis 3 was formed to test the market efficiency in Nepal in changed scenario. For this purpose
run test (daily and monthly) analysis had been conducted to examine whether future share price in
Nepal can be predicted or not in the basis of null or alternative hypothesis.
All observation on daily run test had rejected the null hypothesis. In simple meaning, majority sector
do follow the dependent successive price movement, i.e. future share price are predictable.
When it comes to monthly run test the result showed that seven sector rejects the null hypothesis.
Just Himalayan General & Insurance and Chilime Hydropower sector support the null hypothesis.
Overall 89 percent sample size provides evidence that share price can be predicted.

As a result, run test do not provides sufficient evidence to support null hypothesis, i.e. The
successive prices are independent. Therefore, objective 4 had been fulfilled with the answer that it is
possible to predict future share price. The result is consistency with the study conducted by
Kadariya (2012), Dangol (2012), Bhatta (2010), Baral and Shrestha (2006) but denies the
findings by Pradhan and KC (2010) as in case of auto-correlation analysis, run test support
the random walk hypothesis for the less frequently traded individual stocks.

5.5 Analysis of Open Ended Questionnaire

Open-ended questionnaire was used to analyse the present state and status and the result are:

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Nepalese capital market has many potential to grow but at present state, the market is still
developing. As NEPSE is sole secondary market where share prices are determined by the demand
and supply side other than its financial terms as dividend.
Implementation process has always been criticized and this is same happening with the CDS and
mutual funds. If it could have come to existing previously investors would have be involved more
effectively in Nepalese capital market. If the scenario changes in Nepal there is many more to
happen in this area.

Chapter 6: Conclusion/ Recommendations

6.1 Conclusion

Capital market and financial institutions are the key to the development of any economy, whether
developed or underdeveloped countries.
Developed economics usually already have a highly sophisticated capital market, where as
underdeveloped economics usually have none or only rudimentary institutions in place.
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History with 19 year, Nepalese capital market has many more things to learn from the developed
country to leave its mark in the economy, however, the improvement assessment from various
institutions like World Bank, International Monetary Fund and Indian Capital Market and others had
helped Nepalese capital market to develop in recent time. This market has been deepening with
increased listed companies and amount traded every year.
The aim of this research is to analyze if capital market of Nepal had developed compare to FY
2006/07 or not, and the applicability of share price behaviour theories in changed scenario.
With the help of indicator used in this research shows a significant relationship with listed and traded
companies of Nepal. Moreover, ratio used to measure the market size and the liquidity has provided
the acceptable ratio in developing country. Obviously, the entire indicator used in this study to
measure growth has provided the positive indication. With these all outcome, it has been concluded
that Nepalese capital market has developed since 2006/07. This argument has been supported by
gradual infrastructure improvements in primary and secondary market, i.e. CDS and mutual funds.
On the same time increased, number of financial institution also provides an evidence of
development of capital market.
Present situation of NEPSE had shown that the Development Bank and Finance Sector are more
risky than other sector.
Other part of research aim is to analyze the behaviour of share price theories in changed scenario of
capital market of Nepal.
Run test model used for this statement have provided evidence that Nepalese capital market do not
hold true to the price behaviour theories and does not meet the international norms to capital market.
As capital market tends to develop the price behaviour theories does apply to these market (Baral
and Shrestha 2006: p 101).
A unique characteristic of the Nepalese stock market is its demand and supply chain with more than
million investors, the investment per investors is going down and more retail investors are venturing
into wealth creation. NEPSE is no longer controlled by a group of gamblers but by strong retail
investors.
Primary analysis showed that investors are more interested in capital gain than interest or dividend.
That is the reason the market analysist can assume that when share prices rises there will be
sufficient supply and ultimately pull down the price.

The conclusion is development of capital market in fact does not necessarily mean it is a developed
capital market. That is why price behaviour theories do not support the Nepalese capital market and I
it holds inefficiency form of market.

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Hill (2009, p. 229 explained that if stock price movement were predictable, that would be damning
evidence of stock market inefficiency, so, the conclusion is that Nepalese capital market runs in
inefficiency form.
As it is, argue that stock market is closely related with political system. However, findings show that
NEPSE is not affected by the signalling factor, mainly because of politics. Moreover, primary data
also reveal that it is another factor, which had affected NEPSE index. Other factors like liquidity,
interest rate, economic indicator and higher return from other sector than securities market had been
the major factor that makes difference between NEPSE indexes.
Therefore, in general, capital market has developed since 2006/07. Due to Nepal’s economic
condition and the nature of the individual investor the share price behaviour theories do not apply
and changes in NEPSE index is also not due to the political situation as it is highly advocated that in
developed capital market. This is the main divergence between the developed capital market in
developed country and development of capital market in least developed country.
Nevertheless, development of capital market should not or will not follow the international norms
and act differently.

6.2 Recommendations

As four agencies- NRB, NEPSE, and SEBON have been mandate of supervise the capital market,
there tends to be duplication of supervisory function among them. Thus, there is a need to address
the fragmentation of supervisory function among the agencies.
NEPSE operations need to be examined and strengthened, particularly as it has not been able to
provide adequate information on the market as required

Category listed in the NEPSE should be increased to represents true picture of economic growth.
This approach can be done by relaxing some tough regulation like double taxation to NRN

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investment as instant, as this investment group has invested millions in different productive sectors
from hospital to hydropower, and education few to mention.
There was no variety in the types of instruments available for trading. Government bond trading was
virtually stagnant. Corporate bonds have limited existence. The Government ought to allow for a
more variety of market instruments in primary as well as secondary market.

Mandatory laws and regulations requiring public offering by companies are quite effective in
increasing the supply of corporate scrip. For example, all commercial banks and finance companies
are required to issue a minimum of 30% of their capital base. Similarly, privatized firms are
mandated to make a public float of 25% of their capital base. Therefore, government should enforce
big corporate house that are in business more than 5 years to go public.
Some of the stringent requirement for entry into the market should be relaxed to ensure that more
companies are listed.
There should be public awareness campaign by capital market operators especially now when the
country has three new mutual funds.

Capital markets are highly information sensitive. In a limited market, it is probable that price
manipulation takes place due to insider information, which is extremely difficult to prove and take
action. While this is a part of the regulatory function, the importance of adequate information
dissemination cannot be overstated. Today, the annual publication of the Stock Exchange contains
financial statements of listed companies only through 1994. Financial data is not readily available
nor are uniform accounting standards applied.
Hence, stock exchanges should try to disseminate as much timely public information as possible on
corporate financial performance, which will stabilize any speculative trends in the market.
At the same time, a healthy capital market mirrors the state of economic development of the country,
providing a catalytic role in increasing savings and investment in the country. Hence, it is the
objective of all policymakers to try to ensure a healthy, sustainable and stable growth of capital
markets.

The government should pursue earnestly a stable macroeconomic environment. A stable

macroeconomic environment is crucial for the development of the capital market. Macroeconomic
volatility worsens the problem of informational asymmetries and becomes a source of vulnerability
to the financial system. Low and predictable rates of inflation are more likely to contribute to capital
market development and economic growth. Both domestic and foreign investors will be unwilling to
invest in the capital market where there are expectations of high inflation. Sound macroeconomic
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environment and sufficiently high-income levels-GDP per capita, domestic savings, and domestic
investments are determinants of capital market development in emerging markets.

The development of the banking sector is important for stock market development. At this stage,
Nepal has many banks. Banking system has well developed and helping capital market, however the
increasing trend does only deteriorate the system. Therefore, the regulator body should make tougher
rules for new entrance of banks.

The most effective strategy to having an efficient capital market is restoring investors' confidence.
Public confidence allows activities in the capital market to thrive, since the system will not create
room for manipulation. This can be achieved with new rules and improvements of the system and
instant implication.

6.3 Limitation of the Study

Due to various reasons, this research work is not able to study the completely Nepalese capital
market in detail. Alternatively, the sake of ease this tries to study its subject matter by concentrating
on some important variables and ignoring others. That is why this research is also not free from
limitations. The major limitations of the study are presented below.

1. The cores of this study are based on secondary sources of information. Hence, any incorrectness
in the key information like NEPSE index, SEBON, and sampled companies gathered from the
secondary sources might affect the accuracy of the outcome of study.

2. The study has selected nine sample companies out of 207, so the sample size do not really
represents true samples size. So, the conclusion made cannot reflect to the true picture of present
context of Nepalese Capital Market as in the way Nepalese Capital Market does not reflect true
economy of country.

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3. There might be various techniques and methods to measure development. However, this research
more precisely concentrate on listed and traded companies to test the null hypothesis, i.e.
Nepalese Capital Market has developed.
Similarly, while testing another null hypothesis, successive price changes are independent; there
are various methods to test other than used in this study.

4. Other than above, there are issues of time and cost constraints. The third person obtained both set
of questionnaires on behalf of researcher (visa problem), so there could be some problem of
interpretation and perception of respondents.

Appendices
Appendix A: Annual and Overall Growth of Listed and Traded Companies

Number of Listed Companies Number of Traded Companies

Listed Annual Overall Traded Annual Overall
Companies Growth growth Companies Growth growth
2005/06 135     110    
2006/07 135 0%   116 5%  
2007/08 142 5%   136 17%  
2008/09 159 12%   170 25%  
2009/10 176 11%   198 16%  
2010/11 207 18% 7% 222 12% 12%
Source: NEPSE Annual Report, 2006/07 – 2010/11

Appendix B: Overall Growth Rate of Indicator

Indicator 2005/06 - 2010/11

Overall Growth Rate

Public Issue 21%

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Public Issue Amount 32%
No. of listed securities 29%
No. of traded securities 14%
No. of Transaction 25%
Annual Turnover 12%
Paid up value 31%
Market Capitalization 22%

Security Business person 8%

Source: The Author

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Appendix C: Securities Market Indicators

Securities Market Indicators

(Amount Rs. in million)
2005/2006 2006/2007 2007/2008 2008/2009 2009/2010 2010/2011
Number of Public Issue 29 34 64 64 61 47
Amount of Public Issue 2443.3 2295.5 10668.2 16828.5 10822.41 6754.03
Number of Listed Companies 135 135 142 159 176 207
Paid-up-Value of Listed Securities 19958 21798.8 29465 61140 79356 100238
Number of Listed Securities '000' 226540 243504 321131 637868 821746 1033674
Annual Turnover 3451.4 8360.1 22820 21681.14 11851.11 6665.33
Market Day 228 232 235 234 225 231
Number of Traded Companies 110 116 136 170 198 222
Number of Traded Shares '000' 12221.93 18147.25 28599.77 30547.16 26231.35 26240.39
Number of Transaction 97374 120510 150800 209091 213733 302364
Market Capitalization 96763.7 186301.3 366247.5 512939.07 376871.37 323484.34
% of Turnover on Market Capitalization 3.57 4.48 6.23 4.22 3.14 2.06
% of Market Capitalization on Nominal
GDP at market price 16.03 27.78* 44.62* 53.43 31.86 2.01
NEPSE index (points) 386.83 683.95 963.36 749.1 477.73 362.85

* based on revised estimate of GDP.

Source: NEPSE Annual Report. 2006/07 – 2010/11

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5. Appendix D: Highlights of SEBON

Highlights of SEBON
( Amount Rs.. in Millions)
2005/2006 2006/2007 2007/2008 2008/2009 2009/2010 2010/2011
  No. Amount No. Amount No. Amount No. Amount No. Amount No. Amount
Public Issue Approval 5 390.5 16 940.3 18 1340.2 11 2509.8 37 3144.7 16 2028.4
Debenture Approval 5 2950 2 750
Right Share Registration 15 1817.3 49 7605.4 50 11615 35 10963 31 5544.3
Registration of Bonus Share 3 2757.5 12 427.1 49 3068.8 60 4545.4 62 4414.1
Security Business person 24 23 23 23 38
Registration of Promoters Shares 15 18 1804.1
Licensed Merchant Bank 9 9 17 11 14
Application for the approval of stock
exchange operation 4
Mutual Funds Registration 3

Source: SEBON Annual Report, 2005/06 – 2010/ 11

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Appendix E: Highlights of Security Markets

Highlights of Security Markets

  (Amount Rs. in million)
  2006/2007 2007/2008 2008/2009 2009/2010 2010/2011
No. Amount No. Amount No. Amount No. Amount No. Amount
Public Issue: Ordinary Share 17 1030.3 16 924.8 12 1815.7 28 2649.4 15 1728.8
Debenture Issue . . 5 2950 2 750 . . 1 50
Rights Issue 16 1265.3 42 6093.4 50 14263 33 2551.2 31 5075.2
Listing of Ordinary Share 12 1071.4 15 749.2 17 4637.5 18 5251.7 33 9260.6
Listing of Right Share 57 2815.3 22 3724.6 49 9482.2 48 10154 30 9648.6
Listing of Preference Share - - 1 200 - - - - - -
Listing of Debenture - - 2 1750 5 1800 5 10028 2 7990
Listing of Bonus Share - - 45 1825.5 47 3258 51 3893.8 59 4102.7
Delisting of Securities 12 348.2 5 717.8 - - - - - -

Source: NEPSE Annual Report, 2006/07 – 2010/11

Appendix F: Sector wise Listed Companies

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Sector wise Listed Companies
 
2006/2007 2007/2008 2008/2009 2009/2010 2010/2011
Listed % Listed % Listed % Listed % Listed %
Commercial Banks 15 11% 17 12% 21 13% 23 13% 23 11%
Development Banks 16 12% 23 16% 29 18% 40 23% 61 29%
Finance Companies 53 39% 55 39% 61 38% 62 35% 70 34%
Insurance Companies 16 12% 17 12% 17 11% 19 11% 21 10%
Hotels 4 3% 4 3% 4 3% 4 2% 4 2%
Manufacturing & Processing Co. 21 16% 18 13% 18 11% 18 10% 18 9%
Trading Companies 5 4% 4 3% 4 3% 4 2% 4 2%
Other Companies 5 4% 4 3% 5 3% 6 3% 6 3%
Total 135 100% 142 100% 159 100% 176 100% 207 100%

Source: NEPSE Annual Report, 2006/07 – 201011

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Appendix G: Market Capitalization

Market Capitalization
 
(Mar. Cap Rs. in Millions)
2006/2007 2007/2008 2008/2009 2009/2010 2010/2011
Mar. Cap % Mar. Cap % Mar. Cap % Mar. Cap % Mar. Cap %
Commercial Banks 135588.4 73% 259955.3 71% 302219.29 59% 206282.52 55% 165775.68 51%
Development Banks 6010.6 3% 17997.8 5% 27137.89 5% 27488.87 7% 10495.13 3%
Finance Companies 9889.3 5% 37674.4 10% 43007.13 8% 29869.59 8% 5448.35 2%
Insurance Companies 8059.8 4% 11241.1 3% 10537.49 2% 9756.61 3% 62868.42 19%
Hotels 3261.1 2% 4809.6 1% 4851.95 1% 5285.58 1% 15258.75 5%
Manufacturing & Processing
Companies 6200 3% 7516.9 2% 7706.09 2% 7592.03 2% 1387.48 0%
Trading Companies 796.4 0% 1170.2 0% 1696.36 0% 1617.15 0% 9034.67 3%
Hydropower* 0% 27476.98 8%
Other Companies 16495.7 9% 25881.9 7% 115782.88 23% 88979.67 24% 25738.89 8%
Total 186301.3 100% 366247.20 100% 512939.08 100% 376872.02 100% 323484.34 100%
*categorized as different sector, previously listed as others companies
Source: NEPSE Annual Report, 2006/07 – 2010/11

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Appendix H: Paid up Value

Paid up Value (PAV)

(PAV Rs. In Millions)
  2006/2007 2007/2008 2008/2009 2009/2010 2010/2011
PAV % PAV % PAV % PAV % PAV %
Commercial Banks 9281.9 42.58 14667.3 49.78 24757.87 40.49 32900.64 41.46 41806.19 41.71
Development Banks 1630.9 7.48 2322.7 7.88 5101.17 8.34 10027.14 12.64 16864.69 16.82
Finance Companies 3100.2 14.22 4317.3 14.65 7100.9 11.61 11466.39 14.45 15301.08 15.26
Insurance Companies 1286.7 5.90 1669.7 5.67 1997.75 3.27 2432.94 3.07 3585.29 3.58
Hotels 1552.9 7.12 1552.9 5.27 1561.57 2.55 1580.71 1.99 1615.15 1.61
Manufacturing & Processing Co. 2602.3 11.94 2539.7 8.62 2539.7 4.15 2539.74 3.20 2539.74 2.53
Trading Companies 62.2 0.29 78.4 0.27 78.46 0.13 82.18 0.10 83.42 0.08
Other Companies* 2281.7 10.47 2317.8 7.87 18002.97 29.45 18326.98 23.09 18443.29 18.40
Total 21798.8 100 29465.8 100 61140.39 100 79356.72 100 100238.85 100
*Hydropower is included
Source: NEPSE Annual Report, 2006/07 – 2010/11

Appendix I: Nepalese Economic Indicator

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 Nepalese Economic Indicator
     
2006/07 2007/08 2008/09 2009/10 2010/2011
Gross Domestic Product 728178.00 815663.20 991316.10 1182680.10 548484.70
per capita GDP 27525 30170 35747 41469 51444
Total Fixed Capital Formation
a. Public Sector 20843 20138 22152* 25161# N/A
b. Private Sector 127577.6 88783 87307* 90073# N/A
total investment (Public sector +
private sector) 148420.6 108921 109459 115234 N/A
*Revised Estimate # Preliminary Estimate
Source: Central Bureau of Statistics cited in SEBON Annual Report, 2006/07 – 2010/11.

Appendix J: Signalling factor 1: End of Monarchy (t-test)

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 December 24,
SF 1 2007 End of Monarchy
t-Test: Two-Sample Assuming Equal Variances
NEPSE index on:
Sector 23-Dec-07 25-Dec-07   23-Dec-07 25-Dec-07
Commercial
Bank 1071.62 995.31 Mean 918.21 903.8411111
Manufacturing &
Processing 350.19 350.19 Variance 313160.8105 293771.8316
Hotel 394.95 407.48 Observations 9 9
Others 818.12 818.12 Pooled Variance 303466.321
Hypothesized Mean
Hydropower 1618.13 1622.68 Difference 0
Trading 165.2 165.2 Df 16
Insurance 1052.16 1058.05 t Stat 0.055331723
Finance 982.99 983.58 P(T<=t) one-tail 0.47827962
Development
Bank 1810.53 1733.96 t Critical one-tail 1.745883669
P(T<=t) two-tail 0.956559241
t Critical two-tail 2.119905285  
Source: NEPSE Annual Report, 2006/07 Source: Ms Excel output

Appendix K: Signalling Factor 2: Coalition government lead by Maoist Leader (t-test)

Coalition government
SF 2 August 16,2008 lead by Maoist Leader
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 t-Test: Two-Sample Assuming Equal Variances
NEPSE index on:
14-Aug-
Sector 08 18-Aug-08   14-Aug-08 18-Aug-08
Commercial Bank 1143.62 1127.14 Mean 850.6488889 855.1755556
Manufacturing &
Processing 426.25 426.25 Variance 202938.1101 205352.7654
Hotel 349.42 357.47 Observations 9 9
Others 769.21 769.21 Pooled Variance 204145.4377
Hypothesized Mean
Hydropower 1297.36 1286.97 Difference 0
Trading 203.14 203.14 Df 16
Insurance 820.57 840.33 t Stat -0.02125274
Finance 1193.74 1198.21 P(T<=t) one-tail 0.491653415
Development
Bank 1452.53 1487.86 t Critical one-tail 1.745883669
P(T<=t) two-tail 0.98330683
t Critical two-tail 2.119905285  
Source: NEPSE, Annual Report 2007/08 Source: Ms Excel output

Appendix L: Signalling Factor: Resignation of First Maoist Prime Minister (T-test)

Resignation of First
SF 3 May 23, 2009 Maoist Prime Minister t-Test: Two-Sample Assuming Equal Variances

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 NEPSE index on:
21-May- 24-May-
Sector 09 09   21-May-09 24-May-09
Commercial Bank 676.11 691.52 Mean 600.5144444 605.2111111
Manufacturing &
Processing 431.46 431.46 Variance 38780.43335 40073.33671
Hotel 363.11 363.11 Observations 9 9
Others 681.43 693.18 Pooled Variance 39426.88503
Hypothesized Mean
Hydropower 844.71 852.55 Difference 0
Trading 271.66 271.66 Df 16
Insurance 642.95 644.37 t Stat -0.05017643
Finance 766.37 771.63 P(T<=t) one-tail 0.480301426
Development
Bank 726.83 727.42 t Critical one-tail 1.745883669
NEPSE INDEX 676.64 688.07 P(T<=t) two-tail 0.960602852
t Critical two-tail 2.119905285  
Source: NEPSE Annual Report, 2008/09 Source: Ms Excel output

Appendix M: Signalling Factor 4: Capital gain tax reduced to 5% from 10% (t-test)

Capital gain tax reduced

SF 4 July 15,2011 to 5% from 10% t-Test: Two-Sample Assuming Equal Variances

NEPSE index on:

Sector 14-Jul-11 17-Jul-11   14-Jul-11 17-Jul-11
Commercial Bank 328.7 349.8 Mean 416.1777778 422.7177778
Manufacturing & 591.52 587.34 Variance 21043.02064 21574.95372
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 Processing
Hotel 412.59 412.59 Observations 9 9
Others 492.31 511.11 Pooled Variance 21308.98718
Hypothesized Mean
Hydropower 673.44 687.65 Difference 0
Trading 241.97 241.97 df 16
Insurance 407.14 410.33 t Stat -0.095039163
Finance 303.78 305.63 P(T<=t) one-tail 0.462731911
Development Bank 294.15 298.04 t Critical one-tail 1.745883669
P(T<=t) two-tail 0.925463822
t Critical two-tail 2.119905285  
Source: NEPSE Annual Report, 2010/2011 Source: Ms Excel Output

Appendix N: Signalling Factor 5: Constituent Assembly Fails (t-test)

Constituent Assembly fails to meet

SF 5 May 28, 2011 from drawing up new constitution

NEPSE Index on:

Sector 26-May-11 30-May-11 t-Test: Two-Sample Assuming Equal Variances
Commercial Bank 304.74 305.88
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 Manufacturing &
Processing 504.17 504.17   26-May-11 30-May-11
Hotel 402.06 402.06 Mean 393.36 389.2622222
Others 486.44 472.34 Variance 11035.22388 10531.72564
Hydropower 552.54 540.97 Observations 9 9

Trading 265.96 256.11 Pooled Variance 10783.47476

Hypothesized Mean
Insurance 422.06 418.82 Difference 0
Finance 302.9 303.81 df 16
Development Bank 299.37 299.2 t Stat 0.083709606
NEPSE INDEX 344.5 342.76 P(T<=t) one-tail 0.467162859
t Critical one-tail 1.745883669
P(T<=t) two-tail 0.934325717
t Critical two-tail 2.119905285  
Source: NEPSE Annual Report, 2009/10 – 2010/11 Source: Ms Excel output

Appendix O: Market Capitalisation of listed Companies (% GDP)

  2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

World 71.71 86.66 91.77 96.57 110.00 118.82 58.74 83.82 88.77 66.29
United States 104.80 128.65 138.36 135.07 145.90 142.87 82.55 108.75 118.63 103.62
United
115.67 132.24 127.91 134.10 155.21 137.17 70.26 128.79 137.97 49.43
Kingdom

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South Asia 21.70 38.63 46.97 58.76 74.63 127.85 45.03 73.97 83.59 48.74
Nepal 6.90 7.63 11.73 16.53 19.89 47.77 38.93 42.52 30.24 23.98

Source: World Bank Database, 2012

Appendix P: Market Capitalization of Listed Companies in SAARC region (US$ million)

  2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

India 131,011 279,093 387,851 553,074 818,879 1,819,101 645,478 1,179,235 1,615,860 1,015,370

Nepal 417 483 853 1,344 1,805 4,909 4,894 5,485 4,843 4,529

Bangladesh 1,193 1,622 3,317 3,035 3,610 6,793 6,671 7,068 15,683 23,546

Pakistan 10,200 16,579 29,002 45,937 45,518 70,262 23,491 33,239 38,169 32,764

Sri Lanka 1,681 2,711 3,657 5,720 7,769 7,553 4,326 8,133 19,924 19,437
Source: World Bank Database, 2012

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Appendix Q: Close- Ended Questionnaire

(This Questionnaire is only for the academic purpose. The answer you give us will be kept fully
confidential)

Part I
Demographic and General Information
Following questions are about your personal initiates. This section is very important for
analysing data so please try to be honest.

1. Serial No:

2. Age …………(in years)

3. Sex
□ Male □ Female

4. Employment Sector
□ SEBON/NEPSE □ Bank/ Finance □ Government □ Broker
□ Lecturer/Student □ Corporate House

5. Education Level
□ SLC □ Intermediate □ Bachelors’ □ Masters & Above

6. Level of Investment
□ Below 500000 □ 500000-1500000 □ 1600000-2500000 □ Above 2500000

Part II
Section A: Knowledge on Capital Market

7. Do you know about the Capital Market?

□ Yes □ No □ Some How

8. Does Capital Market help to invest the security that you liked?
□ Yes □ No □ Some How

9. What do you think the development of Capital Market in Nepal?

□ Very Satisfied □ Satisfied □ Average □ Very Dissatisfied □ Dissatisfied

10. What are the major problems of Capital Market?

□ Small Capital Market
□ Lack of Investor's confidence
□ Lack of proper knowledge
□ Lack of co-ordination between monitoring bodies
□ Inappropriate rules and regulations
□ Restriction of foreign investors

11. In which type of market have you invested?

□ Primary Market □ Secondary Market □ Both

12. In which type of security have you invested?

□ Shares □ Corporate Bonds □ Government Bonds □ Shares & Corporate Bonds

13. What are your objectives to invest in such security?

□ Interest □ Dividend □ Capital Growth □ others
14. Have you achieved your objectives by investing in Capital Market?

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 □ Yes □ No □ Some How

15. If further investment opportunities were available, on which type of securities would you
like to invest?
□ Shares □ Corporate Bonds □ Government Bonds □ Shares & Corporate Bonds

Section B: Knowledge of Investment and Stability

16. How do you evaluate your investment in stock market?

□ Very Secure □ Secure □ Not Secure □ Don’t Know

17. Which sector is more secure in term of returns and price stability?
□ Commercial Banks □Development Banks □ Finance Companies □ Hotels
□ Manufacturing & Processing □ Hydropower □ Others

18. Which of the following factors should be considered while making investment decision
regarding the stock of a particular company?
□ Profitability & dividend policy □Future prospect
□ Corporate Governance □ Financial stability

19. How do you react with the news of Government Agencies to invest in Capital Market?
□ Very Satisfied □ Satisfied □ Average □ Very Dissatisfied □ Dissatisfied

20. Will Central Depository System (CDS) improve Capital Market activity?
□ Yes □ No □ Don’t Know

21. Do you think CDS will boost investor's confidence?

□ Yes □ No □ Don’t Know

Market maker has helped to stabiles the share price.

□ Yes □ No □ Don’t Know

22. Market maker can give stability to Nepalese Capital Market.

□ Strongly Agree □ Agree □ Strongly Disagree □ Disagree

Section C: Knowledge on Impact of Signalling Factors

23. Which factor do you think for the NEPSE index drift?
□ Political instability □Rules & Regulation □ Company's news/announcement □ others

24. Which of the following factors that will awake share price of stock?
□ Political stability □Rules & Regulation □ Company's news/announcement □ others

25. When did you experience the share’s price has plunged more sharply?
□ Political instability □Rules & Regulation □ Company's news/announcement □ others

Appendix R: Open- Ended Questionnaire

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This set of open-ended questions is designed to carry out in partial fulfillment of Master's Degree
dissertation. This is entirely for academic research purpose and the information provided will be
kept confidential (Please insert pages if needed)

Name:
Name of Institution :
Position :
Education:
Date of interview:

1. How do you assess the Nepalese Capital Market's present position?

2. What is the present status of the Nepalese Secondary Market?
3. How Nepal Stock Exchange (NEPSE) is developing?
4. NEPSE index is influenced mainly of Bank and Finance Institution. What do you think,
why investors are prominent to invest in BFI over other sectors?
5. What can help to include other sectors in the Capital Market?
6. The Central Depository System (CDS) was established last year but not yet functioned in
the country. Do you think this system will help to boost Capital Market? How?
7. What are the main factors affecting on stock price?
8. How do you find the psychology of investors at present?
9. How more investors can be attracted to the Capital Market?
10. CDS and Mutual Funds are in offing. How will they help improve the Capital Market?
11. How is the future of the Nepalese Stock Market?
12. At the end, any suggestion that might be important to capital market, please.

Appendix S: Daily Closing Price of Sample Companies

Standard Chartered Bank Daily Closing Price
S.No Monthly Closing S.No Monthly Closing S.No Monthly Closing
Date Price   Date Price Date Price

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 1 01/04/2012 1350   47 10/06/2012 1700 93 16/08/2012 1856
2 02/04/2012 1382   48 11/06/2012 1700 94 19/08/2012 1776
3 03/04/2012 1350   49 12/06/2012 1710 95 21/08/2012 1772
4 04/04/2012 1377   50 13/06/2012 1720 96 22/08/2012 1775
5 05/04/2012 1371   51 14/06/2012 1700 97 23/08/2012 1780
6 08/04/2012 1377   52 17/06/2012 1709 98 26/08/2012 1755
7 09/04/2012 1380   53 18/06/2012 1705 99 27/08/2012 1761
8 10/04/2012 1399   54 19/06/2012 1699 100 28/08/2012 1745
9 11/04/2012 1424   55 20/06/2012 1710 101 29/08/2012 1764
10 12/04/2012 1450   56 21/06/2012 1715 102 30/08/2012 1740
11 15/04/2012 1581   57 25/06/2012 1784 103 02/09/2012 1800
12 16/04/2012 1709   58 26/06/2012 1725 104 03/09/2012 1790
13 17/04/2012 1585   59 27/06/2012 1762 105 04/09/2012 1771
14 18/04/2012 1690   60 28/06/2012 1760 106 05/09/2012 1766
15 19/04/2012 1720   61 01/07/2012 1766 107 06/09/2012 1780
16 22/04/2012 1800   62 02/07/2012 1724 108 09/09/2012 1750
17 24/04/2012 1980   63 03/07/2012 1719 109 10/09/2012 1742
18 25/04/2012 2178   64 04/07/2012 1740 110 11/09/2012 1810
19 26/04/2012 2200   65 05/07/2012 1747 111 12/09/2012 1800
20 29/04/2012 2193   66 08/07/2012 1725 112 13/09/2012 1829
21 30/04/2012 2037   67 09/07/2012 1760
22 02/05/2012 1845   68 10/07/2012 1788
23 03/05/2012 1956   69 11/07/2012 1775
24 07/05/2012 2074   70 12/07/2012 1803
25 08/05/2012 2200   71 15/07/2012 1799
26 09/05/2012 2100   72 16/07/2012 1781
27 10/05/2012 2050   73 17/07/2012 1790
28 13/05/2012 1902   74 18/07/2012 1800
29 14/05/2012 1740   75 19/07/2012 1810
30 15/05/2012 1914   76 22/07/2012 1852
31 16/05/2012 1991   77 23/07/2012 1881
32 17/05/2012 2050   78 24/07/2012 1865
33 20/05/2012 1995   79 25/07/2012 1890
34 21/05/2012 2010   80 26/07/2012 1852
35 22/05/2012 1975   81 29/07/2012 1840
36 23/05/2012 1863   82 30/07/2012 1831
37 24/05/2012 1912   83 31/07/2012 1850
38 27/05/2012 1988   84 01/08/2012 1840
39 29/05/2012 1873   85 05/08/2012 1840
40 30/05/2012 1686   86 06/08/2012 1869
41 31/05/2012 1663   87 07/08/2012 1872
42 03/06/2012 1829   88 08/08/2012 1837
43 04/06/2012 1780   89 12/08/2012 1830
44 05/06/2012 1730   90 13/08/2012 1830
45 06/06/2012 1730   91 14/08/2012 1820
46 07/06/2012 1740   92 15/08/2012 1752
Source: NEPSE Database

Ace Development Bank

S.No Monthly Closing S.No Monthly Closing
Date Price   Date Price
1 01/04/2012 111   47 03/07/2012 128
2 02/04/2012 109   48 04/07/2012 128
3 03/04/2012 105   49 05/07/2012 12
4 04/04/2012 103   50 08/07/2012 120

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 5 08/04/2012 100   51 09/07/2012 113
6 11/04/2012 102   52 17/07/2012 122
7 15/04/2012 104   53 18/07/2012 130
8 16/04/2012 106   54 19/07/2012 132
9 17/04/2012 108   55 23/07/2012 133
10 18/04/2012 110   56 24/07/2012 129
11 19/04/2012 120   57 25/07/2012 129
12 22/04/2012 131   58 31/07/2012 127
13 26/04/2012 143   59 05/08/2012 127
14 29/04/2012 157   60 06/08/2012 125
15 30/04/2012 165   61 07/08/2012 125
16 02/05/2012 162   62 08/08/2012 119
17 03/05/2012 160   63 13/08/2012 116
18 07/05/2012 165   64 16/08/2012 116
19 08/05/2012 171   65 19/08/2012 114
20 09/05/2012 170   66 21/08/2012 110
21 10/05/2012 165   67 22/08/2012 110
22 13/05/2012 159   68 23/08/2012 111
23 15/05/2012 156   69 26/08/2012 108
24 16/05/2012 165   70 27/08/2012 112
25 17/05/2012 156   71 28/08/2012 110
26 20/05/2012 153   72 29/08/2012 112
27 21/05/2012 156   73 02/09/2012 116
28 22/05/2012 155   74 03/09/2012 118
29 24/05/2012 150   75 04/09/2012 118
30 27/05/2012 153   76 06/09/2012 117
31 29/05/2012 138   77 10/09/2012 117
32 30/05/2012 136   78 11/09/2012 119
33 31/05/2012 133   79 13/09/2012 117
34 03/06/2012 135        
35 04/06/2012 133      
36 05/06/2012 129      
37 06/06/2012 123      
38 07/06/2012 125      
39 11/06/2012 122      
40 12/06/2012 122      
41 14/06/2012 122      
42 19/06/2012 122      
43 21/06/2012 124      
44 27/06/2012 130    
45 28/06/2012 128    
46 01/07/2012 130    
Source: NEPSE Database

Himalayan General &

Insurance Soaltee Hotel Unilever Nepal
S.No Monthly Closin S.No Monthly Closin S.No Monthly Closin
Date g Price   Date g Price Date g Price
22/05/201 198 21/05/201 19/04/201
1 2   1 2 200 1 2 6222
25/06/201 197 29/05/201 2 29/04/201
2 2   2 2 220 2 6310
24/07/201 200 31/05/201 3 17/05/201
3 2   3 2 236 2 6436
4 25/07/201 204   4 03/06/201 240 4 23/05/201 6308

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 2 2 2
30/08/201 200 06/06/201 5 27/05/201
5 2   5 2 248 2 6434
06/09/201 07/06/201 6 29/05/201
6 2 193   6 2 240 2 6306
09/09/201 184 10/06/201 7 05/06/201
7 2   7 2 233 2 6300
10/09/201 181 11/06/201 8 12/06/201
8 2   8 2 237 2 6300
11/09/201 172 12/06/201 9 13/06/201
9 2   9 2 230 2 6300
12/09/201 169 13/06/201 10 25/06/201
10 2   10 2 226 2 6300
13/09/201 153 18/06/201 11 03/07/201
11 2   11 2 226 2 6300
    27/06/201 12 16/07/201
    12 2 223 2 6426
    28/06/201 13 17/07/201
    13 2 226 2 6685
01/07/201 14 24/07/201
Nepal Finance Ltd   14 2 229 2 6600
S.No Monthly Closin 02/07/201 15 06/08/201
Date g Price   15 2 230 2 6733
19/04/201 04/07/201 16 07/08/201
1 2 134   16 2 234 2 6810
29/04/201 05/07/201 17 13/08/201
2 2 132   17 2 230 2 7084
30/04/201 08/07/201 18 16/08/201
3 2 130   18 2 230 2 7369
09/05/201 10/07/201 19 19/08/201
4 2 128   19 2 234 2 7500
10/05/201 11/07/201 20 23/08/201
5 2 126   20 2 230 2 7650
13/05/201 15/07/201 21 27/08/201
6 2 124   21 2 230 2 7854
14/05/201 17/07/201 22 03/09/201
7 2 122   22 2 230 2 7995
21/05/201 18/07/201 23 04/09/201
8 2 121   23 2 230 2 8200
27/05/201 22/07/201 24 09/09/201
9 2 119   24 2 230 2 8280
30/05/201 23/07/201 25 10/09/201
10 2 117   25 2 230 2 8150
31/05/201 24/07/201  
11 2 115   26 2 234    
04/06/201 25/07/201
12 2 115   27 2 230 Bishal Bazar Co.
06/06/201 31/07/201 S.No Monthly Closin
13 2 117   28 2 238 Date g Price
07/06/201 06/08/201 12/04/201 2169
14 2 119   29 2 234 1 2
10/06/201 07/08/201 24/04/201
15 2 119   30 2 236 2 2 2084
01/07/201 13/08/201 25/04/201
16 2 117   31 2 236 3 2 2100
12/07/201 14/08/201 10/05/201
17 2 115   32 2 236 4 2 2017
26/07/201 19/08/201 20/06/201
18 2 113   33 2 236 5 2 2049
30/07/201 22/08/201 26/06/201
19 2 107   34 2 240 6 2 2050
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 01/08/201 30/08/201 31/07/201
20 2 103   35 2 248 7 2 2000
06/08/201 02/09/201 13/08/201
21 2 100   36 2 252 8 2 1961
12/08/201 03/09/201 23/08/201
22 2 98   37 2 257 9 2 2000
13/08/201 05/09/201 26/08/201
23 2 96   38 2 261 10 2 1921
14/08/201 06/09/201 27/08/201
24 2 97   39 2 261 11 2 1883
22/08/201 09/09/201 28/08/201
25 2 95   40 2 265 12 2 1846
29/08/201 10/09/201 29/08/201
26 2 94   41 2 266 13 2 1810
30/08/201 11/09/201 30/08/201
27 2 89   42 2 266 14 2 1705
05/09/201 12/09/201 12/09/201
28 2 88   43 2 270 15 2 1773
06/09/201 13/09/201  
29 2 89   44 2 280
Source: NEPSE Database

Nepal Doorshanchar Co. Ltd

S.No Monthly Closing S.No Monthly Closing S.No Monthly Closing
Date Price   Date Price Date Price
1 10/04/2012 404   42 12/06/2012 468 83 13/08/2012 535
2 11/04/2012 407   43 13/06/2012 464 84 14/08/2012 537
3 12/04/2012 414   44 14/06/2012 465 85 15/08/2012 534
4 15/04/2012 430   45 17/06/2012 460 86 16/08/2012 534
5 16/04/2012 473   46 18/06/2012 464 87 19/08/2012 530
6 17/04/2012 438   47 19/06/2012 463 88 21/08/2012 537
7 18/04/2012 452   48 20/06/2012 462 89 22/08/2012 541
8 19/04/2012 455   49 21/06/2012 460 90 23/08/2012 545
9 22/04/2012 466   50 25/06/2012 472 91 26/08/2012 559
10 24/04/2012 476   51 26/06/2012 465 92 27/08/2012 594
11 25/04/2012 486   52 27/06/2012 470 93 28/08/2012 593
12 26/04/2012 521   53 28/06/2012 480 94 29/08/2012 587
13 29/04/2012 520   54 01/07/2012 470 95 30/08/2012 586
14 30/04/2012 495   55 02/07/2012 472 96 02/09/2012 590
15 02/05/2012 450   56 03/07/2012 471 97 03/09/2012 588
16 03/05/2012 459   57 04/07/2012 475 98 04/09/2012 581
17 07/05/2012 499   58 05/07/2012 475 99 05/09/2012 577
18 08/05/2012 508   59 08/07/2012 480 100 06/09/2012 575
19 09/05/2012 500   60 09/07/2012 490 101 09/09/2012 573
20 10/05/2012 495   61 10/07/2012 498 102 10/09/2012 570
21 13/05/2012 473   62 11/07/2012 490 103 11/09/2012 575
22 14/05/2012 464   63 12/07/2012 490 104 12/09/2012 584
23 15/05/2012 473   64 15/07/2012 503 105 13/09/2012 595
24 16/05/2012 520   65 16/07/2012 490
25 17/05/2012 507   66 17/07/2012 490
26 20/05/2012 490   67 18/07/2012 500

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 27 21/05/2012 498   68 19/07/2012 505
28 22/05/2012 485   69 22/07/2012 525
29 23/05/2012 460   70 23/07/2012 526
30 24/05/2012 481   71 24/07/2012 530
31 27/05/2012 501   72 25/07/2012 524
32 29/05/2012 451   73 26/07/2012 520
33 30/05/2012 438   74 29/07/2012 510
34 31/05/2012 451   75 30/07/2012 525
35 03/06/2012 488   76 31/07/2012 521
36 04/06/2012 475   77 01/08/2012 525
37 05/06/2012 465   78 05/08/2012 525
38 06/06/2012 457   79 06/08/2012 523
39 07/06/2012 463   80 07/08/2012 528
40 10/06/2012 461   81 08/08/2012 530
41 11/06/2012 465   82 12/08/2012 531
Source: NEPSE Database

Chilime Hydropower Co.

S.No Monthly Closin S.No Monthly Closin S.No Monthly Closin
Date g Price Date g Price Date g Price
01/04/201 588 04/06/201 793 05/08/201 1015
1 2 43 2 85 2
02/04/201 599 05/06/201 777 06/08/201 1040
2 2 44 2 86 2
03/04/201 585 06/06/201 770 07/08/201 1070
3 2 45 2 87 2
04/04/201 596 07/06/201 780 08/08/201 1095
4 2 46 2 88 2
05/04/201 596 10/06/201 770 12/08/201 1078
5 2 47 2 89 2
08/04/201 594 11/06/201 780 13/08/201 1066
6 2 48 2 90 2
09/04/201 605 12/06/201 780 14/08/201 1058
7 2 49 2 91 2
10/04/201 592 13/06/201 779 15/08/201 1033
8 2 50 2 92 2
11/04/201 612 14/06/201 779 16/08/201 1038
9 2 51 2 93 2
12/04/201 611 17/06/201 780 19/08/201 1039
10 2 52 2 94 2
15/04/201 649 18/06/201 789 21/08/201 1040
11 2 53 2 95 2
16/04/201 700 19/06/201 787 22/08/201 1045
12 2 54 2 96 2
17/04/201 714 20/06/201 788 23/08/201 1050
13 2 55 2 97 2
18/04/201 680 21/06/201 810 26/08/201 1049
14 2 56 2 98 2
19/04/201 730 25/06/201 833 27/08/201 1057
15 2 57 2 99 2
22/04/201 766 26/06/201 831 28/08/201 1070
16 2 58 2 100 2
24/04/201 827 27/06/201 840 29/08/201 1072
17 2 59 2 101 2

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 25/04/201 909 28/06/201 843 30/08/201 1070
18 2 60 2 102 2
26/04/201 896 01/07/201 832 02/09/201 1094
19 2 61 2 103 2
29/04/201 888 02/07/201 840 03/09/201 1097
20 2 62 2 104 2
30/04/201 851 03/07/201 840 04/09/201 1096
21 2 63 2 105 2
02/05/201 771 04/07/201 846 05/09/201 1097
22 2 64 2 106 2
03/05/201 786 05/07/201 845 06/09/201 1099
23 2 65 2 107 2
07/05/201 833 08/07/201 850 09/09/201 1100
24 2 66 2 108 2
08/05/201 900 09/07/201 862 10/09/201 1098
25 2 67 2 109 2
09/05/201 874 10/07/201 877 11/09/201 1095
26 2 68 2 110 2
10/05/201 857 11/07/201 885 12/09/201 1097
27 2 69 2 111 2
13/05/201 812 12/07/201 873 13/09/201 1100
28 2 70 2 112 2
14/05/201 766 15/07/201 910
29 2 71 2
15/05/201 842 16/07/201 881
30 2 72 2
16/05/201 875 17/07/201 882
31 2 73 2
17/05/201 886 18/07/201 904
32 2 74 2
20/05/201 870 19/07/201 916
33 2 75 2
21/05/201 885 22/07/201 964
34 2 76 2
22/05/201 866 23/07/201 982
35 2 77 2
23/05/201 815 24/07/201 956
36 2 78 2
24/05/201 850 25/07/201 986
37 2 79 2
27/05/201 881 26/07/201 1002
38 2 80 2
29/05/201 793 29/07/201 970
39 2 81 2
30/05/201 714 30/07/201 977
40 2 82 2
31/05/201 740 31/07/201 980
41 2 83 2
03/06/201 818 01/08/201 997
42 2 84 2

Source: NEPSE Database

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Appendix T: Monthly Closing Price of Sample Companies

Sample Company Standard Ace Nepal Himalayan Soaltee Unilever Bishal Nepal Chilime
Chartered Developmen Finance General & Hotel Nepal Bazar Doorsancha Hydropowe
Bank t Bank Insurance r r

Monthly Date Closing Closing Closing Closing Price Closing Closing Closing Closing Closing
Price Price Price Price Price Price Price Price

Jun/ Jul 2011 1800 141 187 200 200 4781 2655 419 822
Jul/ Aug 2011 1690 145 181 200 196 4781 2655 410 840
Aug/ Sept 2011 1360 130 161 200 180 5276 2703 405 780
Sept/ Oct 2011 1470 126 163 200 183 5171 2757 414 855
Oct/Nov 2011 1350 130 163 200 186 5688 2756 420 871
Nov/Dec 2011 1318 114 163 200 168 6035 2756 425 814
Dec 2011/Jan 2012 1410 104 163 200 168 6269 2400 439 609
Jan/ Feb 2012 1332 112 132 200 185 5712 2400 433 595
Feb/Mar 2012 1380 109 132 196 190 6100 2419 450 597
Mar/Apr 2012 1450 102 132 196 197 6100 2169 414 637
Apr/May 2012 1902 159 124 190 197 6310 2017 473 812
May/Jun 2012 1700 122 119 201 226 6300 2017 465 779
Jun-Jul 2012 1799 113 115 197 230 6300 2050 503 910
Jul/Aug 2012 1856 116 97 204 236 7369 1961 534 1038

Source: NEPSE Annual Report (2010/11) and NEPSE Database.

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