The Relationship Between Profitability and Stock Prices: Evidence from the Saudi Banking Sector

Abstract

This paper aims to examine whether there is a relationship between the profitability ratios; measured by Net Profit Margin (NPM), Return on Assets (ROA), and Return on Equity (ROE), and the stock market prices of listed banks in Saudi Arabia. In order to introduce this relationship for investors to make investment decisions, Quarterly profitability of the selected banks and stock prices data during 2011 to 2018 are analyzed by panel data regression modeling techniques. This paper has conducted a panel unit root test. The data are shown to be non-stationary at the level with constant and with time trend for some variables, and they became stationary in the first difference for all variables. Therefore, to test the research’s hypotheses, Autoregressive Distributed Lag (ARDL) model is used, the results of which implied that there is no long – term rel/ationship between profitability and stock prices, while there is a positive significant association between ROA and stock prices in short–term.

Keywords: Banking Sector, Profitability Ratios, Saudi Arabia, Stock Prices.

DOI: 10.7176/RJFA/10-14-09

Publication date:July 31^st 2019