Share price: One of the important indicators of stock market performance is the general trend in share prices of companies listed in the stock exchange market. A general increase in share prices does not only show that the company is growing but also indicates the growth of the capital market. This implies that companies will also find it easy to raise additional capital through the capital market.
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The use of share prices in logs was essentially to reflect the impact of the multiple currency on stock returns. This is mainly because the percentage changes in stock prices technically captures stock market returns as shown by the basic formula for stock market returns given as: Stock returns = Capital gains + Dividend yield
Where: Capital gains is appreciation in the stock price (Pt Pt1) such that:
Total stock returns = (Pt Pt1) D
Taking the logs on each size implies that:
The percentage stock market return = Log(Pt Pt 1) Log(D)= (Pt Pt1)/Pt1
The stock market performance depends on the individual firms performance and these also depend on an array of factors including the domestic macroeconomic factors, idiosyncratic factors as well as the international developments (Adjasi & Biekpe, 2006; Awan & Iftekhar, 2015; Zivengwa, Mashika, Bokosi, & Makova, 2011). Hence the model incorporated all the representative factors to ensure it is able to account for each one of them. In essence, the stock
market index is an average index of the individual firms’ performance. Therefore, the
individual share prices are a good indicator of the stock market performance. The model used a number of variables to explain the impact of the multiple currency system on stock market performance in Zimbabwe.
The share prices, however, depend on a number of variables, notably, economic performance as measured by VMI, domestic interest rates (DINT), money supply growth (MS), the consumer price index representing inflation (CPI), the size of the company (SIZE), the type of business represented with a dummy (DUM), international developments such as foreign interest rates (FINT), commodity prices (COM), and the global stock market volatility index (VIX).
The VMI: The VMI was included to proxy for the overall economic activity affecting the stock
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frequency in most developing countries. A significant relationship appears to exist between GDP and Industrial Production Indices (Humpe & Macmillan, 2009; Nishat & Shaheen, 2004; Chen, Roll, & Ross, 1986; Fama E. F., 1981). The performance of the economy also affects a
firm’s cash flow. Higher real GDP implies a higher demand for goods and services, which
translates into higher revenues for the firm and higher stock prices. As a result, a positive relationship was expected between real GDP and the stock market performance.
Money supply growth (MS): money supply growth in the economy shows the liquidity situation in the economy under the multiple currency system. There are several studies in empirical literature, which have shown the significance of money supply in influencing stock markets, for instance, (Kirui, Wawire, & Onono, 2014; Flannery & Protopapadakis, 2002). In this study, money supply was measured by the broad definition of money (M3).
The Consumer price index (CPI): The study also includes the Consumer Price Index (CPI) to show how inflation may influence stock market performance in the multiple currency era. Since investors are worried about preserving the value of their investment, they consider inflation developments as this can affect the real return from their investments.
The exchange rate (EXR): the exchange rate has been included given the importance of the
Rand to US dollar exchange rate in the Zimbabwean economy. South Africa’s trade with
Zimbabwe constitutes over 60% of total trade between Zimbabwe and the rest of the world. Therefore, developments between the Rand and the US dollar exchange rate is very important to also explain stock market developments under the multiple currency system in Zimbabwe.
Commodity prices index (COM): commodity prices were included in the analysis given the reliance of Zimbabwe on exports of primary commodities; an increase in commodity prices leads to an increase in the cost of production for some firms, while increasing the revenue of commodity-producing firms. However, the expected net effect of commodity prices on stock market returns as a whole is indeterminate. Moreover, a firm’s value also depends on the ruling exchange rate. Following dollarisation, a country no longer has an exchange rate of its own, however the dynamics of company performance is influenced by the exchange rates of major trading partners. For this reason, the South African rand exchange rate was used in this study
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to assess the impact of exchange rates on stock market performance. Some firms are negatively related to the exchange rate, some are positively related, and some have no relationship, thus it was expected that exchange rates were unlikely to yield a significant coefficient.
Foreign interest rate (FINT): This has been included to determine whether international interest rates developments influence the ZSE performance. International investors look for high return on investment (ROI). As such, when foreign interest rates are lower, they move capital to developing countries looking for high ROI.
Volatility Index: This has been included to understand whether international stock market developments also have a bearing on the ZSE. This is because in the global economic village, capital can easily move between borders as investors search for high returns. As such, adverse stock market developments in advanced economies can actually force capital to move to developing countries, thus influencing share prices in the receiving economies.
The dummy variable: This is important to understand if the effect of the multiple currency on
the stock market performance depends on the type of economic activity. The idea of making such a distinction was to check whether the impact was different between the two sectors.