Instructions For this assignment, you will write an essay in which you compare and contrast the following strategic measurement tools used by business and human resource professionals as presented in
Influence of the Indicators Return on Investment and Earning per Share on the Decision of the Indivi dual Investor – an Econometric Approach No. 4 (1 68 )/20 22 681 Influence of t he Indicators Return on Investment and Earning per Share on the Decision of the Individual Investor – an Econometric Approach Cristian LUNGU, Ph. D. Student, West University of Timisoara, e-mail: cristian.lungu00@e -uvt.ro Abstract In a global financial crisis, access to various investment resou rces becomes inevitable. Stable economic growth is possible under maximum use of accumulated savings for investment purposes. Ensuring favorable conditions for investing the population's savings in national investment assets remains an urgent problem. Citi zens' savings, constituting their private property, should be used in the investment process, considering the differences between their individual preferences, the economic development of regions etc. In countries with developed market economies, individua l investors are the main participants in the market for investment resources. By occupying a certain part of the investment market, individual investors serve as an important stabilizing force in times of crisis. Thus, this study aims to evaluate the impac t of ROI and EPS indicators on the investment strategy of natural persons on the Bucharest Stock Exchange and to predict the behavior of investors according to the variation of these variables. Key words: return on investments; earning per share; stock mar ket; investment; JEL Classification : G10, G11, M42 Audit Finan ciar, XX, Nr. 4(168) /2022, 681 -688 ISSN: 1583 -5812 ; ISSN on -line: 1844 -8801 To cite this article: Lungu, C. (2022), Influence of the Indicators Return on Investment and Earning per Share on the Decision of the Individual Investor – an Econometric Approa ch, Audit Financiar , vol. XX, no. 4(168)/2022, pp. 681 -688 , DOI: 10.20869/AUDITF/2022/168/025 To link this article: http://dx.doi.org/10.20869/AUDITF/2022/168/025 Received: 25.05.2022 Revised: 2.08.2022 Accepted: 8.10.2022 Cristian LUNGU AUDIT FINANCIAR , year XX 682 1. Introduction The importance of individual investors for the development of the economy and the stock market is highlighted by the fact that the investment activity of citizens is seen as an indicato r of the development of market relations. From the point of view of the development of the financial market as a whole and the stock market, its component, the massive attraction of investors - natural persons is considered a necessary condition. On the Ro manian stock exchange, individual investors can form an investment portfolio in different ways. The first is with the help of a professional participant in the securities market (broker, trustee), which in turn involves either transferring funds for the ad ministration of the trust to a broker, or making independent decisions on the purchase and sale of securities, while the broker only provides technical access to the exchange market. The second way is with the help of collective investment institutions. In the current context, the volatile economic environment forces any investor in a stock market to have considerable funds and financial - accounting skills to make a profit/income as high as possible and reduce the losses related to the trading activity. Thus , by imposing some "minimum trading requirements" to achieve the objective, the need to study the important factors that contribute to shaping the investment strategy of natural persons appears. Taking into account the universal character of the ROI and EP S financial indicators in the stock market investment strategies of individual and institutional investors, the following objectives were formulated: Evaluation of the impact of ROI and EPS on the investment strategy of individuals on the Bucharest Stock E xchange; Forecasting the investment strategy according to the variation of the ROI and EPS indicators. The proposed study was developed in five sections: the first part presents the context of the research, the second section is dedicated to the review of the specialized literature existing up to the present moment, and the following two sections include the research methodology together with the results obtained. The final section, fifth, highlights the conclusions resulting from the econometric analysis. 2. Specialized literature overview In a concise, selective way, the current state of knowledge, in a national and international context, will be highlighted in what follows. The primary objective of investors to make investment decisions is to obtain a max imum level of financial benefits. For most investors active on the stock market, the profitability of companies is an important criterion in determining the investment strategy. The specialized research carried out by Meythi and Hartono (2012) at the level of the Indonesian Stock Exchange, came to the conclusion that ROI and EPS information had a more significant impact on investors' decisions, compared to other financial performance indicators. Besides this, Qodriyah (2018) in his study on companies in the manufacturing industry showed that information on return of investment can be used to evaluate the performance of entities and has a major importance on the level of stock market capitalization Vasilescu (2011) highlighted the importance of using indicat ors such as value added (EVA), return on capital employed (ROCE), return on investment (ROI), earnings per share (EPS) and market value added (MVA) that could influence the process decision -making and investment plan remodelling. Badruzaman (2020) is of th e opinion that a high EPS reflects the level of effectiveness and efficiency of the company's operations in managing the company, thus influencing investors to invest in the company. Hassanzadeh and Bigdeli (2019) believe that ROI and EPS indicators are he lpful because they allow to examine options and make a more informed choice. They are also an essential component of an investment strategy, as they become "proof" that investing money in a project is a sound business decision. Susetyo (2013) conducted res earch to determine how the market reacted to the disclosure of earnings per share by various food and beverage companies. The study found that earnings information can help investors make better decisions. Several studies have shown this to be true, such a s Praono and Christian (2004), Dimitros et al. (2013) and Nord Allah (2011). Different research found that earnings per share (EPS) had no significant impact on stock returns. This was discovered by Setivironi (2011), Tiswanu (2011) and Rahim (2013), who a ll came to this conclusion. Influence of the Indicators Return on Investment and Earning per Share on the Decision of the Indivi dual Investor – an Econometric Approach No. 4 (1 68 )/20 22 683 3. Research methodology 3.1. Structure of the analyzed sample The econometric analysis of the impact of ROI and EPS indicators on the investment strategy of individual investors is carried out at the level of a sample of 65 comp anies listed on the Bucharest Stock Exchange. The temporal interval on which the study was carried out is 2017 -2021, including a number of 1,950 observations. The distribution of companies by type of activity is described in Figure no. 1 . There is a concen tration of observations that show that most companies operate in the production & materials industry (40%), utilities & services (22%), respectively, heavy industry (12%), totaling over 70% of the analyzed sample. Figure no. 1. Structure of the sample by type of activity Source: Author's projection 3.2. Empirical data analysis The first part of this study focuses on analyzing the extent to which ROI and EPS indicators influence the strategic decisions of individual investors on the Bucharest Stock Exchange. To test the existence of a link between these three variables, at the BVB level, we opted for an econometric Cristian LUNGU AUDIT FINANCIAR , year XX 684 analysis based on the method of least squares (OLS).Thus, the econometric function related to the stated hypotheses is presented as follo ws: Yt = α + β*Xt + εt, where: Yt – the dependent variable: the individual investor's decision; α – the coefficient of the free term; β – the coefficient of the independent variable; Xt – the independent variables: ROI and EPS indicators; εt – residual error; t – period of time (2017 - 2021). In the second part of the study, the forecasting of the investment strategy according to the variation of the ROI and EPS indicators was carried out based on a VAR model, which can be written in the form of the fol lowing equation: The investor's decision = + * + * + where: - the coefficient of the free term; , - are the coefficients of the e ndogenous variables; - denotes the residual error. Carrying out the VAR econometric analysis involved the use of specialized software (for example, Eviews) to complete the following stages: I. Application of stationarity tests A series is sta tionary if a shock to it is temporary and absorbed over time. If there is a non -stationary series, a stationary series is obtained by differentiation. At the level of this study, we tested the stationarity of the series based on the Augmented Dicley -Fuller and Philips -Peron tests. II. Performing the Granger test Using the Pairwise Granger causality test allows checking the proportion in which the current level of a variable is due to previous levels. At the same time, by adding independent variables, the ex planation can be improved. III. Selecting the appropriate VAR model and lag To select the VAR model and the appropriate lag, the "VAR Lag Order Selection Criteria" test was used, the results of which present decision -making information regarding the crite ria LR (sequential modified LR test statistic), FPE (Final prediction error), AIC (Akaike information criterion), SC (Schwarz information criterion), HQ (Hannan -Quinn information criterion). IV. Checking the stability condition of the model Checking the st ability condition of the VAR model is done by using the AR Root functions. V. Identification of impulse functions The evaluation of the effect of a shock of the current or future variation of the independent variables on the investor's decision was made ba sed on the graphical illustration of the results obtained after performing the Cholesky test. 4. Results and discussions 4.1. Assessing the extent to which ROI and EPS indicators influence the strategic decisions of individual investors Analyzing the data presented in Table no. 1 , the following conclusions can be drawn: 1. The probabilities attached to the test are lower than the 5% relevance level; therefore, the coefficients are considered statistically significant; 2. The correlation coefficients (R -squared) c onfirm that throughout the analyzed period, there is a significant statistical link between the dependent variable – the individual investor's decision, and the independent variables – the ROI and EPS indicators, the changes in investors' decisions being r eflected in the change in ROI and EPS ( for example, in the case of 2021, a 1 pp increase in the ROI indicator causes an increase in the private placements of individual investors by 0.17 pp, and in the case of an increase in the EPS indicator by the same value, the investments of natural persons in the analyzed sample increase by 0.49 pp ). Therefore, it can be appreciated that the built model can be considered representative to describe the link between ROI, EPS indicators and the individual investor's dec ision at the Bucharest Stock Exchange level in the period 2017 -2021. Influence of the Indicators Return on Investment and Earning per Share on the Decision of the Indivi dual Investor – an Econometric Approach No. 4 (1 68 )/20 22 685 Table no.1. The results of the regression equation of the influence of ROI and EPS on the individual investor's decision Year (2017) Regression coefficient Prob. ROI 0,147009 0,003212 EPS 0,327305 0,023261 R-squared 0,229161 Year (2018) Regression coefficient Prob. ROI 0,116349 0,017352 EPS 0,454488 0,003561 R-squared 0,207898 Year (2019) Regression coefficient Prob. ROI 0,119746 0,038251 EPS 0,430971 0,012581 R-squared 0,338 442 Year (2020) Regression coefficient Prob. ROI 0,223548 0,014791 EPS 0,450259 0,001597 R-squared 0,266966 Year (2021) Regression coefficient Prob. ROI 0,173447 0,012561 EPS 0,498425 0,008935 R-squared 0,208540 Source: Own processing using Eviews 10 4.2 . Forecasting the investment strategy according to the variation of the ROI and EPS indicators In the first stage of the VAR analysis, the results of the Augmented Dicley – Fuller test showed that the series are not stationary, being represented b y a unit root. As a result, we proceeded to the first -order differentiation of the series, and the results indicated that the first -order integrated series are stationary 1 (see Table no. 2 , Philips -Peron test). Table no. 2. Testing the stationarity of the series based on the ADF and PP tests Test results - Augmented Dickley - Fuller Test results - Philips - Peron Null Hypothesis: The investor's decision has a unit root Exogenous: Constant Lag Length: 0 (Automatic - based on SIC, maxlag=10) t-Statistic Prob.* Augmented Dickey -Fuller test statistic -0.935561 0.7707 Test critical values: 1% level -3.534868 5% level -2.906923 10% level -2.591006 Null Hypothesis: D( The investor's decision ) has a un it root Exogenous: Constant Bandwidth: 0 (Newey -West automatic) using Bartlett kernel Adj. t -Stat Prob.* Phillips -Perron test statistic -0.103745 0.0341 Test critical values: 1% level -3.536587 5% level -2.907660 10% level -2.591396 Null Hypothesis: ROI_2021 has a unit root Exogenous: Constant Lag Length: 0 (Automatic - based on SIC, maxlag=10) t-Statistic Prob.* Augmented Dickey -Fuller test statistic -0.081089 0.9466 Test critical values: 1% level -3.534868 5% level -2.906923 10% level -2.591006 Null Hypothesis: D( ROI_2021 ) has a unit root Exogenous: Constant Bandwidth: 0 (Newey -West automatic) using Bartlett kernel Adj. t -Stat Prob.* Phillips -Perron test statistic 0.370709 0.0202 Test critical values: 1% level -3.536587 5% level -2.907660 10% level -2.591396 1 Probability >0.05 represent s non -stationary series Cristian LUNGU AUDIT FINANCIAR , year XX 686 Test results - Augmented Dickley - Fuller Test results - Philips - Peron Null Hypothesis: EPS_2021 has a unit root Exogenous: Constant Lag Length: 9 (Automatic - based on SIC, maxlag=10) t-Statistic Prob.* Augmented Dickey -Fuller test statistic 0.611708 0.9889 Test critical values: 1% level -3.552666 5% level -2.914517 10% level -2.595033 Null Hypothesis: D( EPS_2021 ) has a unit root Exogenous: Constant Bandwidth: 1 (Newey -West automatic) using Bartlett kernel Adj. t -Stat Prob.* Phillips -Perron test statistic -3.974865 0.0028 Test critical values: 1% level -3.536587 5% level -2.907660 10% level -2.591396 Source: Own processing using Eviews 10 Based on the Pairwise Granger causality methodology, presented in Tabl e no. 3 , it was verified whether the changes in the ROI and EPS indicators led to the remodeling of the investment strategy of natural persons. A value of less than 0.05 for the probability displayed by Eviews implies rejection of the null hypothesis. For a level of significance greater than 5%, it follows that the variation in the values of the financial indicators is a cause of the change in the investor's decision. Table no. 3. Results of the Pairwise Granger test Pairwise Granger Causality Tests Date: 07/30/22 Time: 13:30, Sample: 1 67, Lags: 2 Null Hypothesis: Obs F-Statistic Prob. ROI_2021 does not Granger Cause The Investor's Decision _2021 64 0.13528 0.8737 EPS_2021 does not Granger Cause The Investor's Decision _2021 64 0.03065 0.9698 Source: Own processing using Eviews 10 The results of the VAR Lag Order Selection Criteria test, presented in Table no. 4 , indicate that for the eight theoretical lags, the selection indicators (FPE, AIC, SC, HQ) recomm end a lag equal to 0 for the VAR model "Investor Decision – ROI – EPS". The appropriate choice of this lag is also confirmed by checking the degree of stability of the VAR model through the AR Root function (see Table no. 5 ). Table no. 4. Criteria for selecting the order of the VAR lag VAR Lag Order Selection Criteria Endogenous variables: The Investor's Decision _2021 ROI_2021 EPS_2021 Exogenous variables: C Date: 07/30/22 Time: 13:32, Sample: 1 67, Included observations: 60 Lag LogL LR FPE AIC SC HQ 0 -323.4714 NA* 10.68413* 10.88238* 10.98710* 10.92334* 1 -316.5685 12.88541 11.46441 10.95228 11.37115 11.11613 2 -312.5501 7.099233 13.57062 11.11834 11.85136 11.40506 3 -309.6 835 4.777680 16.75285 11.32278 12.36996 11.73239 4 -306.9804 4.234869 20.90490 11.53268 12.89400 12.06517 5 -305.0180 2.878098 26.93073 11.76727 13.44274 12.42264 6 -292.7016 16.83247 24.79684 11.65672 13.64635 12.43497 * indicates lag order selected by the criterion Source: Own processing using Eviews 10 Influence of the Indicators Return on Investment and Earning per Share on the Decision of the Indivi dual Investor – an Econometric Approach No. 4 (1 68 )/20 22 687 Table no. 5. Verification of the stability condition of the model Roots of Characteristic Polynomial Endogenous variables: The Investor's Decision _2021 ROI_2021 EPS_2021 Exogenous variables: C Lag specification: 1 2, Date: 07/30/22 Time: 13:37 Root Modulus 0.990879 - 4.119421i 4.236918 0.990879 + 4.119421i 4.236918 0.347840 - 0.320326i 0.472865 0.347840 + 0.320326i 0.472865 No root lies outside the unit circle. VAR satisfies the stability condition. No root lies outside the unit circle. Source: Own processing using Eviews 10 The processing of financial data according to the requirements of performing a VAR regression model allowed us to identify two impulse responses, illustrated in Figure no. 2 , which evaluate the effect of a shock on the current or future variation of the variables ROI, EPS and the decision of the individual investor. Figure no. 2. Resul ts of the VAR model using the Cholesky test Source: Own processing using Eviews 10 Therefore, the application of the Cholesky test generated the following conclusions: 1. A shock of +1% of the ROI indicator at the level of the studied sample of 65 compa nies traded on the Bucharest Stock Exchange will generate in the first forecasted year an increase of 0.18% in the investments made by individuals, followed by a decrease in the pace of attracting financial placements by the fourth year and Cristian LUNGU AUDIT FINANCIAR , year XX 688 recovery of gro wth at the level of the third year by the end of the forecasted year seven; 2. A shock of +1% of the EPS indicator at the level of the studied sample of 65 companies traded on the Bucharest Stock Exchange implies an approximate evolution to that found in the case of the ROI indicator, therefore, it will generate a 0.60% increase in investments made by natural persons, followed by a decrease in the pace of attracting financial placements until the fifth year, maintaining this level until the end of the forecast ed time interval. 5. Conclusions The obtained results confirm that the strategy of the individual investor is influenced by the EPS and ROI indicators. The application of the two econometric methods, the OLS method (the least squares) and the VAR method, r egarding forecasting the evolution of the studied variable according to the change of the independent variables at the level of the studied sample highlights the fact that the EPS indicator has a more significant weight compared to the ROI indicator, in th e case of determining the strategy of investment of natural persons. Therefore, this aspect tells us the tendency of the individual investor to orientate financial placements within companies that register a considerable profit per share, classifying the c riterion of recovery of investments over time as a secondary place. The limits of the research consisted in the fact that there is no certified database, the data and indicators were extracted and calculated manually, being taken from the set of financial statements published by companies on the website of the Stock Exchange. Future research directions aim to expand the sample both nationally and internationally, analyzing in addition to financial indicators and cultural/social criteria. BIBLIOGRAPHY 1. Ba druzaman, J., (2020). The impact of earning per share and return on equity on stock price, Journal Syst Rev Pharm , Vol. 15, No. 2, pp. 245 -256; 2. Bigdeli, T., Hassanzadech, M. (2019). Return of Investment (ROI) in Research and Development (R&D): Towards a fr amework , Journal of The International Conference COLLNET , Vol. 3, No. 4, pp. 42 -47; 3. Dimitros. I., (2006). The Introduction of Economic Value Added (EVA) in The Greek Corporate Sector, The South European Review of Business and Accounting , Vol. 4, No.2, pp. 23 -29; 4. Meythi.P, Hartona. H., (2012). The effect of earnings and cash flow information on stock prices, Scientific Journal of Accounting , Vol. 7, No. 2, pp. 87 -93; 5. Nurdillah, M. 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