What Factors Motivate the Stock Analyst Forecast on Listed Companies in Colombo Stock Exchange?

Abstract

The purpose of this research is to determine the main forecasting factors of stock analysts, to analyze whether stock analysts have a rational base for their advice to the individual investors. According to the Modigliani-Miller theorem, the factors which affected to dividend and capital gain could influence investors. The regression analysis was used to identify the factors which influence the forecast decision on shares of the companies. The P/E ratio, dividend yield, return on equity and rate of retained profit are the financial indicators which affected on experts’ advice. The market performance indicators of the return sort, volatility of shares have a significant impact on perfect investment decision. The emerging markets exhibit greater sensitivity to abnormal volume trading, however, we found that it is less sensitive to stock analysts’ forecast in emerging CSE. The stock analysts forecast decision more concern on firm dividend than capital gain. We fundamentally disagree with the argument of Modigliani-Miller theorem in terms of stock analysts’ forecast and individual investor’s point of view. Because, behavior of individual investors in emerging CSE is prefer on low risk stable dividend than future capital gains. Baker and Powell (1999) and Baker et al. (2001) made same conclusion by studying dividend decision of firms.

Keywords: Colombo Stock Exchange (CSE), Stock Analyst, Individual Investors, Financial, Risk, Market

JEL Classification: G10, G11