The Effect of earnings retention on common stock returns

An applied Study in the Iraq Stock Exchange

A Thesis

Submitted to the Council of the College of Administration & Economics at University of Karbala

In Partial Fulfillment of the Requirements for the Degree of  M.Sc.    in Business Administration

By

Husam Ali Hussein Alfayyadh AL-Ganimy

Supervised by

Asst. Prof. Dr. Maithim R. AL-Hasnawi

The concept of earnings retention one of the important concepts, because it contains important  processes and procedures for decision-making related to it, so it requires balance sheet study of the company’s and consider the plans investment and determine the necessary financing needs, and then carry out the distribution or retention of the earnings. Moreover, the distribution and retention policy has  large effects beyond the limits of the tool for the distribution of the net surplus revenue for the costs. To reach that any difference in the rate of distributions have a major impact on stock prices, and changing stock prices in the financial market according to the latest information. This kind of changes in stock prices knows the hypothesis efficient market. Therefore, this study sought to test the effect of earnings retention on common stock returns as well as over the speed and response of common stock prices for information earnings retention. The sample study consisted of (8) banks. The limits study time of the has included years (2005-2013). The spatial boundaries were: the Iraq Stock Exchange, and adopted study two main hypotheses:

 
1- There is no correlation and effect statistically significant of between earnings retention and common stock returns.

2- Iraq Stock Exchange characterized by efficient semi-strong in responding to an event announcement earnings retention.

    In order to analyze the variables of the study and test hypotheses have been using a number of statistical methods and mathematical and financial. The study reached a number of conclusions, including:

1- There is relationship correlation and impact of statistically significant between the earnings retention and common stock returns and this is contrary with the hypothesis first study.

2- inefficiency Iraq Stock Exchange in the form semi-strong in connection its with response to an event announcement earnings retention and this is contrary with the hypothesis second study.

    The study found numbers of recommendations including:

1- prefers to rely on the proportion retention rather than ratio distribution as a reliable indicator of in determining the market value of shares of the companies, especially in terms of determining the growth rate future expected and its impact on their value.

2- Iraq Stock Exchange management should be recognize the dangerous of the inefficiency of the market in responding to public information  and announcements earnings retention especially, because that would be exploited by some professionals to formulate rules trading to enable them to achieve abnormal returns on account to other participants in the market and this brevets the performance of the markets function basically the optimal allocation of the economy resources.