Abstract:
Despite several studies on the effect of financial performance in terms of profitability
on stock price, existing literature provides contradictory conclusions regarding this
association. Therefore, the main purpose of this study is to explore the effect of
financial performance in terms of profitability on stock price, with special reference to
the listed manufacturing companies in Sri Lanka from 2011 to 2021. Earnings per
Share (EPS), Return on Equity (ROE), and Return on Assets (ROA) were used as
proxies of profitability since the current study aims to investigate the aspect of
profitability, while the average share price was used as a proxy of stock price.
Moreover, the study used three firm-specific control variables, namely, Dividend per
Share (DPS), Firm Size (FS), and Debt to Equity (DE). The data was collected from the
published annual reports of 29 listed manufacturing companies out of 34 listed
manufacturing companies. By employing fixed effect panel regression analysis, this
study aims to examine whether there is an effect of financial performance in terms of
profitability on stock price. Accordingly, the findings reveal a statistically significant
positive effect on stock price in terms of ROA and EPS, despite ROE indicating a
negative effect on stock price. Moreover, somewhat simultaneous and divergent results
were indicated by the control variables. Accordingly, FS and DE demonstrated a
positive association with stock prices. Contrary to this, DPS does not indicate any
association with stock price. Moreover, the findings of the study provide insights to
investors for encouraging investments and maximizing their investment income, to
listed companies for making policy decisions connected with stock price and other
investments, and to policymakers for formulating appropriate policies to promote stock
investment while regulating credit policies and interest rates.
