Investors behaviour in stock exchanges based on price multiples and value drivers, a case study based on Colombo stock exchange in Sri Lanka

Abstract

The main objective of this paper is to identify investor behaviour in the Colombo Stock Exchange by using price multiples and the corresponding value drivers. This study uses widely available and easily identifiable three price multiples (price earning, price to book value and price to sales ratios) and corresponding three value drivers (earnings per share, the net book value per share and sales). The main sources of data for this study are secondary data from the Colombo Stock Exchange and published Annual Reports of the 61 sample companies which covers 80% of the market capitalization. The regression analysis is used to forecast prices and obtained the pricing errors between the actual and forecasted prices. The main findings indicate that the net book value is the best value driver amongst all others for the entire market for investor behaviour. The best value driver is earning per share except for food, beverage and tobacco category 7. It is, therefore, recommended to use the net book value per share as the main value driver for the valuation of stocks in the Colombo Stock Exchange, except for food, beverage and tobacco sector companies.