An analysis of the effect of value of shares traded on stock exchange on company profitability: a case study of Stanbic Bank Uganda Limited (2009-2019)
Mukuye, Mulumba Marshal
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The main objective of the study was to examine the effect of value of shares traded on company profitability for the years 2009-2019. Stanbic Bank Uganda Limited and Uganda Securities Exchange were used as case studies. The study adopted a time series causal research design. Secondary quantitative data was collected for the study from Stanbic Bank Uganda Limited and Uganda Securities Exchange. The data on value of shares traded was further aggregated by month from 2011-2019 and consisted of 108 observations. The data on company profitability comprised 11 observations. Data Analysis was done using STATA software. Vector Auto Regression was used to study the effect of value of shares traded on the stock exchange and it fulfilled the assumptions of no autocorrelation, stability of the model and of normality of disturbances generated by the model. Value of shares traded was proxied by Turnover and company profitability was proxied by Profit. Profit and Turnover were transformed by natural log transformation to improve estimation of VAR model and an optimal lag length of one was selected. The transformed variables were then tested for stationarity as a condition for fitting a VAR model using the ADF test for unit root. The transformed variables were stationary (MacKinnon approximate p-value for In Profit=0.0017 and MacKinnon approximate p-value for In Turnover=0.0036). The natural log of Profit was regressed on its first lag and the first lag of Turnover. The model was found to be a good fit since p=0.0173 at 95% level of confidence. Profit had an insignificant positive effect on Turnover (p=0.178). The first lag of Profit had a significant positive effect on Profit (p=0.006). Therefore, the value of shares had an insignificant positive effect on company profitability meaning value of shares traded on stock exchange had no effect on company profitability. Findings from the graphical analysis of a line plot of company profitability showed a positive trend that is to say an upward trend. The Augmented Dickey Fuller Test revealed that company profitability contained a unit root (MacKinnon approximate p-value=0.2396) and therefore was non-stationary. Company profitability was therefore positively trended. Hence, listed firms exhibited positive profitability trends. Findings also revealed an ARIMA (0, 0, 0) model for monthly value of shares traded from 2011-2019. Residuals were tested for independence using a Portmanteau Test and found to be pure white noise (p=0.9984). Value of shares traded was therefore randomly distributed. The study recommended more firms to list on stock exchange due to positive trend of profitability enjoyed by listed firms as shown from the positive trend of graphical analysis. It also recommended firms to focus on reduction of costs, innovation and emphasis on customers as a way of increasing company profitability due to insignificant positive effect between value of shares traded and profitability from the vector auto regression model (p=0.178) Furthermore, the study recommended greater flexibility of capital requirements and liquidity in adjusting to uncertain economic environment shown by the randomness of value of shares traded from the ARIMA(0,0,0) model and residuals being pure white noise (p-value=0.9984).