Investors risk perception effect on share prices: A case study on Kuwaiti cement companies

Abstract

The aim of this study is to examine investors risk perception effect on the share prices of Kuwaiti cement companies listed at Kuwait stock exchange (KSE) over the period 2010-2018. The risk perception is driven by investors' expectations on the future financial soundness of companies they invest in. As a result, when investors have negative expectations this would lead them to reduce their investment in these companies resulting in lower share prices and vice-versa. In this research Zmijewski x-score model is used as risk proxy to evaluate the financial soundness of Kuwaiti cement companies and its effect on their share prices. The research uses ordinary least square regression (OLS) to examine the relation between x-score and the share prices. While OLS regression is used to examine the relation between the variables that relation does not necessarily imply any cause-and-effect relationship. For that matter Granger causality test was used to examine the cause-and-effect relationship. Results obtained from this study showed that Kuwaiti cement companies had a strong financial positions and are safe from bankruptcy, at least for the next two years. The research also revealed that there is a statistically significant relation between Zmijewski x-score and the stock price but at the same time Granger causality test showed that Zmijewski x-score does not cause the movement in the price of the share. 1. Introduction With Kuwait vision of becoming a financial centre by the year 2035, an investment of almost $100 billion was set to achieve that goal. In order to accomplish that goal huge infrastructure is required where cement is an essential material that is needed. While there are many cement companies in Kuwait, only four of them are listed at Kuwait stock exchange. These four companies control over 75% of the cement market in Kuwait. These companies are Kuwait cement company (KCC), Hilal cement company (HCC), Portland cement company (PCC) and Acico cement company (ACC). The topic of financial distress has captured the attention of researchers for over 50 years, but that attention tends to increase during the periods of financial crises. Elloumi and Gueyie (2001) [15] describes a company with a negative net income for two consecutive years as being in a financial distress stage. Ward et al. (2006) [27] stated that a company facing financial distress risk is a company that has an interest coverage ratio of less than one, meaning that revenues generated from debt are less than the interest paid on the debt indicating difficulties in repaying their short-term obligations. While Zmijewski (1984) defines financial distress of firms as 'the act of filing a petition for bankruptcy'. Altman et al. (2017) [9] stated that financial distress prediction models provide help for the credit rating agencies, debt providers and equity holders to analyze the financial health of the firms. For corporate managers financial distress model serve as a whistle-blowing mechanism to initiate remedial measures. The Zmijewski x-score model is one of the most commonly used models for measuring the financial distress of companies. The model is based on the data of 40 bankrupt and 800 non-bankrupt industrial firms for the period 1972-1978 to develop the x-score model. Zmijewski (1984) [28] claimed that the model achieved a 99% accuracy rate in determining the bankruptcy of companies two years prior to their bankruptcy event. AlAli et al. (2018a) [5] used the Zmijewski x-score model to examine the financial soundness of companies on oil and gas companies listed at Kuwait stock exchange over the period 2010-2017.