2.0 Introduction

This literature review is initially done on stock price, earnings, earnings per share, dividend, dividend per share and dividend yield in terms of their features and relationships.

The focus will be given on how stock price being related to the other four variable. Then, the definition of the variables, their connections and topic related information.

2.1 Review of the Literature

2.1.1 Stock price

Stock is ownership in a company, with each share of stock representing a tiny piece of ownership. (Lawrence J. G., 2005). The more shares you own, the more of the company you own, and the more dividends you earn when the company makes a profit. In the financial world, ownership is called equity. Stocks are in two primary classes. The one you choose depends on what you want from a stock. Preferred stock typically pays regular dividends, and investors who want income foremost from their stocks favor it. Common stock represents ownership of a company and may offer more rights and privileges than preferred stock.

Despite some evidence of share price inefficiencies, the speculative component of real share prices is insignificant in the same investment equations implying that the short-term departures from share-market efficiency do not significantly influence investment spending. (Micheal A. & Robert S., 1996)

It is also expected that abnormal profit earn can be earn by chances in future because there are a lot of researchers two decades ago already prove the Efficiency Market hypothesis (EMH) again and again. (Elroy D. & Massoud M., 2000)

Even in Malaysia stock market, there are researchers found that the stock market is in weak efficiency form. (Annuar N., Ariff’ M. & Shamser M., 1991)

As the researchers always found similar conclusion; it is not always the stock price react or sensitive to the information or news and the variation of stock price may be reflected by the other factors. (David M. C., James M. P. & Lawrence H. S., 1989)

According to researchers Akintoye, et al. (2009), there are some other factors that could influence the stock price. This means that the stock price is notably influenced by a number of factors such as book value of the firm, dividend per share, earnings per share, price earnings ratio and dividend cover. The authors also stated that the conditions could appear whether it is primary or secondary market.

There are Factors behind increases or decreases in the demand and/or supply of a particular stock could include company fundamentals, external factors, and market behavior. (Al – Tamimi, H., 2007),

2.1.2 Earning per share

Earnings per share represent one of the most widely used indicators measuring the performance of a company. It is calculated by dividing net income by total number of outstanding shares. (Lawrence J. G., 2005)

There are researchers, suggest that the Earning per share (EPS) is part of share price, and the increasing or decreasing of EPS will result the same situation to the share price. (Edward A. & William B., 2006)

The rationale behind the EPS and shareprice are related is when an investor hold a share, he will hold part of company’s income as well because of the ownership. Therefore, the price of share will follow the movement of the company’s earning. (M. J. Gordon, 1959)

However, there are some researchers back 70s, doubt the relationship of EPS and share price, they conclude that there are other factors should be taken into account. (Burton G. Malkiel and John G. Cragg, 1970)

Molodovsky (1995) discussed dividends as the hard core of stock value. The importance of dividends was originally emphasized in the work of Williams (1938). The current study will attempt to investigate identify the most influencing factors of UAE stock markets. Some studies have concluded that company fundamentals such as earning and valuation multiple are major factors that affect stock prices. Other indicated that inflation, economic conditions, investor behavior, the behavior of the market and liquidity, are the most influencing factors of stock prices. The results of this study are consistent with most of the findings provided in the literature review and support the existence of a long-run relationship between stock prices and both internal and external factors. The most important influencing factor is EPS. This means that an increase in the demand for stocks with higher earnings increases stock prices and, consequently, the trading volume. The findings indicate a strong positive impact of EPS on the UAE stock prices. (Al – Tamimi, H., 2007),

According to Oscar Harkavy (1953), the two proposals have been made regarding the retained earnings and common stock price for large, listed corporations. High proportion of earnings retained (EPS) are associated with greater price appreciation. The crucial factor is the profitable utilization of investors’ funds. The studies of the individual companies demonstrate that the me