Interactions between Earnings and Share Prices in Nigeria Brewery Industry

Abstract

The aim of the study is to determine the direction and significance of the interactions between earnings per share and market price of ordinary shares in the Nigeria brewery industry from 2000 to 2013. Engle and Granger 2-step cointegration and correlation approach was adopted in the analysis with an estimation of an error correction model. Stationarity of time series data were tested with the adoption of Augmented Dickey Fuller (ADF) and Phillips-Perron (PP) procedures. All the study variables were integrated of the same order I(1), signaling a cointegration. Market Price of Shares has a short term positive and significant effect on Earnings Per Share while the long run coefficient shows a negative and insignificant influence in line with our initial expectations. The error correction mechanism suggests that deviations from equilibrium could be corrected at approximately 7% per annum, implying that the distortions affecting EPS in the long term could be corrected in approximately 14 years and three months (approximately 171 months). There is a unidirectional causality running from MPS to EPS at lag 1 period, implying that MPS granger causes EPS in the short run. The result further reveals that a very strong relationship exists between MPS and EPS at approximately 80%. Firms in the brewery industry should, therefore, pursue strategies geared towards cost reduction, elimination of wastes, integrations, full automation of production lines, attractive packaging and production of low sugar alcoholic drinks in order to push up earnings and ultimately enhance the market price of their shares.

Keywords: EPS, MPS, Granger, Brewery, Cointegration, Nigeria.