Porftolio Management In Emergent Markets

1.Methodology

For the purpose regarding this investigation there have been selected a number regarding five countries, including Bulgaria, Slovenia, Poland, Hungary and Czech Republic. For each country there have been selected a number regarding 5 companies listed on the local stock markets and the study was focused on four consecutive years, starting from 2010 until 2013. The period selected is right after the World Crisis started in 2007 and it is focused on emerging countries in Central and Eastern Europe. For Bulgaria, the selection includes the following companies: Sopharma, Chimimport, Elhim Iskra, Bulgartabac and Trace Group Holding. In the case regarding Slovenia: Mercator, Telekom Slovenia, Slovnaft, Ses Timace. Poland: Gazownictwo SA, Synthos SA, Tauron Polska Energia, Polski Koncern Naftowy, Lubelski Wegiel Bogdanka. For Hungary: Magyar Telekom, MOL, Richter Gedeon AG, RABA, ANY PLC. And for the Czech Republic: Phillip Morris, Unipetrol, Telefonica C.R, New World Resources and Pegas Nonwove. The study focuses on the Balance Sheets regarding the selected companies and their Income Statements as well as the year end Closing Prices. All the data concerning the Balance Sheet and the Income Statements were extracted from (http://www.investing.com) and for the Closing Prices were taken from (http://www.finance.yahoo.com) . In order to fulfill the necessary ratios, the annual average interest rates were extracted from (http://www.eurostat.ec.europa.eu) . The data selected was exported in excel format and for each year, computations have been made in order to generate the economic model. In order to do this, a number regarding sixteen ratios have been applied.

The first ratio used was Long Term Asset Ratio, which measures the degree regarding investment regarding the company’s capital, with a positive influence on the economic stability. The values situated around 60% indicate a normal situation, greater than 60% meaning that the share regarding long term assets is increasing at a greater rate than the total assets and below 60% creates a positive situation if the turnover is at least equal with the compared base period.

Formula:

The second Ratio used is the Current Asset Ratio, which reflects how the society deals with their short-term debt using cash and cash equivalents. The influence regarding this ratio is a positive one, meaning a high value reflects a stable economic condition.

Formula:

Current and Long Term Liabilities Ratio represents the weight regarding debt due within one year and over in the total debt regarding the company, reflecting the proportion regarding liabilities in total assets, with a negative influence on economic stability.
Formula:

Liquidity Ratios help establish the capability regarding the society to fulfill its short term obligations. For this purpose two liquidity ratios have been used: current ratio and quick ratio.

Current ratio is used to measure the company’s ability to fulfill its short term obligations. The society is considered more liquid if the Current Ratio is higher. A current ratio regarding 2 is accepted in some specific industries in comparison with the value regarding 1 which is considered a minimum, going below this value indicates an insufficient current liquidity and exceeding 2 represents an inefficient use regarding current assets.

Formulas:

Quick Ratio is the second Liquidity Ratio used and represents the more liquid values, because it doesn’t take into consideration the least liquid assets. The accepted values fluctuate between 0.65 and 1.0, lower meaning insufficient quick liquidity and above an improper use regarding cash and cash equivalents.

Quick Ratio(Acid Test) represents current ratio less inventories. The accepted values fluctuate between 0.65 and 1.0, lower meaning insufficient quick liquidity and higher meaning an improper use regarding cash and cash equivalents.

Formula:

The Solvency Ratio is used to measure the company’s ability to pay its outstanding debts. This ratio has a positive influence on the company’s performance in the long run, an increase in the ratio has an increasing effect on the performance regarding the company.
Formula:

The Total Debt Ratio is included for calculating the extent regarding the company’s leverage. By showing the proportion regarding assets that are financed through debt, meaning that high debt to assets ratio indicates low economical flexibility, increasing risk.

Formula:

Economical Autonomy Ratio indicates the independence regarding the society in respect with their economical sources. It is established by calculating the weight regarding total liabilities in total equity, meaning a higher authonomy generates a more stable company.

Formula:

The Return on Assets Ratio measures the weight regarding the Average Total Assets in the Net Income regarding the company, meaning that ROA measures the capability regarding the company to manage its assets in order to generate profit. The influence regarding ROA is a positive one, meaning that the assets generate a sufficient return to the average total assets.

Formula:

Return on Equity is a measure regarding efficiency used by companies to establish the stability regarding the society through the profits generated from shareholder’s equity.

Formula:

Working Capital Ratio expresses the amount regarding long term capital used to fund current assets. If LTC is in excess regarding long term assets, it can be said that the society has a working capital that can be rolled over to make room for some components regarding the current assets. Therefore working capital has an important role in allowing a society to meet its operational requirements when current liabilities can’t rise to the challenge.

Formula:

Working Capital Requirments Ratio represents the sources regarding financing current activities. A positive value regarding working capital requirments results in a negative influence on the performances regarding the company, a less than zero WCR results in a positive situation for the society by increasing its stability.

Formula:

WCR =

By analysing the negative influence regarding the indebtness on the economical stability upon a company, the coverage involving the ratio in the present study is completely and accuratelly justified. The scope of the ratio is to measure the limit surrounding the company’s leverage. After analysing the debt this has lead me to relate the inferences involving the amount of the debt, and the point of the low economical stability. From an interpretative point of view, after analysing the communion between debt and stability, the fact that there is an opposite communion between those two aspects mentioned above is relatively evident. The companies in terms of low risk reveal an aspect surrounding a high margin in terms of safety, as in the same moment when higher companies at risk reveal a low margin in terms of safety.

The negative aspect constitutes the differences between the average interest rates and the economical stability surrounding the company. An interest regarding the interest rate signifies that the option of borrowing money will rise, in order for the company to rise when it involves the debt for the repayment regarding the borrowed funds.

A study surrounding the net treasury has been accomplished in manners of comparing working capital with working capital neccesity. This aspect reflects the accomplishemnt regarding the economical balance, in terms of the rule regarding economy and acceptance to evaluate the money found in a cash overflow. This certain overflow surrounding money should be established in the most accurate and possible conditions regarding return, risk and liquidity. The financial health development sucrrounding a company is mainly influenced in a positive manner due to the net treasury ratio which ensures the balance at the level of the entire enterprise.

Formula:

Net treasury= Working capital-Working capital requirement

The rates-rotation speed stands for a synthetic view upon how resource management is accomplished due to the velocity surrounding the rotation which was used in order to establish the level regarding usage of the resources obtained for the well-being of the company, therefore, during the neccesary passing through all the stages with the goal to finalize the revenue aspect. This aspect reveales a negative view on the health performance in terms of the companies, meaning that no matter how high it might go, the lower it becomes the development of the company. Among the two aspects an inverse communion is developed, which in the end it manifests itself in terms of the price regarding the stock of the companies.

Formula:

The closing prices recorded for every society at the end of a year represent a vital indicator surrounding the manner in which the company concludes a year regarding the value for which its securities are marketed. From a general point of view, the closing price is seen as the most reliable and current form of valuation in terms of security up until the point of trading is initiated once more on the following trading day.

The closing prices assures a neccesary marker for the appropriate development of the company. With the purpose of revealing the importance of the closing price to the aim regarding this study, one must concompany the importance for the companies in question and their stability and potentially closing price indicator.Therefore, an accurate and high closing price from one year to another one is an obvious manner of revealing the increasing trend in manner of performance, value and stability for any given investor who is to invest in the securities regarding that sepcific company. As mentioned before, the closing price results in a positive effect upon the health performance of any of the companies mentioned above.

Formula:

Another level is represented by the process regarding data normalization with the purpose of releasing manners of interpretation. Data normalization consists in an operation including organizing data in order to minimize redundancy and in order to create well-structured communions. The entire proceeding data normalization is meant for each in order to reveal the results which were transferred in accurate tables in correspondance to a settled batch of dimensions. The sixteen ratios mentioned above had to be merged. For this, there were seven dimensions developed in order to have an influence on the economical stability as this is the goal regarding the study which in the end has the capacity to influence the price evolution. In the process regarding the development of data normalization, for every computed indicator it was neccesary to investigate whether it focuses upon a positive or a negative impact on the economical health performance surrounding the company in question. The decision whether it exerts a positive impact is based on the fact that if the ratio rises it has the capacity to assure the company’s stability in the economic sector as well as it might result to further growth which ultimately can increase the company’s closing price. For a negative impact the opposite situation might occur, namely s rise in the ratio cannot sustain the economic soundness regarding the company, ultimately leading to a decrease in the closing price in terms of security.

Beyond the process of determinating the impact upon each ratio, in order to normalise the breach regarding all factors such as data, two formulas were developed, one for the case regarding the positive impact and another formula for the negative results. In terms of normalisation, the closing price was established. These proceedings resides in the determination of the maximum potential values as well as the minimum potential values for every breach regarding an indicator in terms of the company and the specificure the company’s stability in the economic sector as well as it might result to further growth which ultimately can increase the company’s closing price. For a negative impact the opposite situation might occur, namely s rise in the ratio cannot sustain the economic soundness regarding the company, ultimately leading to a decrease in the closing price in terms of security.

Beyond the process of determinating the impact upon each ratio, in order to normalise the breach regarding all factors such as data, two formulas were developed, one for the case regarding the positive impact and another formula for the negative results. In terms of normalisation, the closing price was established. These proceedings resides in the determination of the maximum potential values as well as the minimum potential values for every breach regarding an indicator in terms of the company and the specific year. The minimum and maximum potential values had to be then replaced in the following formulas:

For positive influence (+) : (x_t-x_min)/(x_max-x_min ); where „t” represents the current value

For negative influence (-): (x_(max )-x_t)/(x_(max-) x_min ); where „t” represents the current value

The values obtained after data normalization vary only between 0 and 1.

One must mention how each of the sixteen indicators merged with the goal to form various corresponding dimensions. Thereby, the total long-term asset ratio, total current asset ratio, current liabilities ratio and long-term liabilities ratio merged in ordert to form the soi-distant structure dimension. The following dimension froms the current ratio, the quick ratio and the solvency ratio in the soi-distant liquidity and solvency dimension. The next step is taking together the Return of Assets Ratio and Return on Equity in the basis regarding the soi-distant dimension results, in which economical liberty and interest rate develops another dimension named finauth, and one must acquire the soi-distant rotation, and as its name says it comes from the rates-rotation speed indicator. The dimension grouping working capital, working capital requirement and net treasury were called the wkwkrnt dimension.

2. Results and Rendering

The following section of the study surrounds upon the breach regarding the results emerged after the process of grouping every dimension which was made due to data normalization.. The following results which were obtained in accordance with every dimension, but also the variation in the closing prices were transferred into a separate spreadsheet program in order to be more easily imported into the Stata software. For data reduction and construction regarding the effective model the principal component research (PCA) was used in order to pervade into the establishment of the structure surrounding the data. The Principal Component Research has the purpose to create a dimension for the economical status regarding every company from all twenty-five which are in the process of being analyzed. The Principal Component Research reveals two panels as a result of the data which is imported. During the analysis of the first panel we are able to observe a specification regarding every value which are ordered in a decreasing manner, from the highest value to the lowest one. The second panel contains sepcifications of the specific vectors. Meanwhile, the first principal component registeres the maximum overall variance. The last displayed principal component holds the smallest variance mongst all unit length variables linear combinations. The latter are notions worth to be mentioned.

All the primary results from all the countries mentioned at first, can be separated and form three primary denominations. During the first category regarding the results we might identify a table created by Stata displaying the weights attached to every dimension. With the help of these weights they will come in the structure regarding the common indicator. The table also reveals the variance in accordance to all the main factors and in addition to the previous statements, the values corresonding to every variable is available. Al the positive values result in a positive display throughout the economical status involving the company and all the negative values correspond to a debasement in the company’s economical status. The following category takes the form of an U-shaped curve, which refers to the nonlinear communion between two variables, in our case, revealing the purpose regarding the study, the U-shaped curve represents the nonlinear union between the economical status indicator and the closing prices regarding the economical gists. The third category focuses upon the results taken the shape of a graphic in the shape of a scatter plot, which has a certain scale and in which there is a graphically reprezentation of the variance surrounding the closing prices of the economic gists for every company in respect to the finacial status regarding the company. All these categories presented will serve its goal in searching fo an explaination to reveal the relation between the closing prices and the status of each company.

2.1. Results for Bulgaria

An analysis of all the levels mentioned above have been followed and a first panel was generated by Stata ( see Table 1. which contains all seven original components with the specific values ordered from the highest point to the lowest). The first and the second component reveal values above 1, but it can easily be observed that component 1 has a a specific value, with a difference between them. Therefore, the first component has a specific variance, explaining the content of the total variance. The following main component is obvious from the table which registers a specific variance, resulting in the content of the total variance. The results focus upon the standpoint that the first two main aspects could explain a prorportion from the total variance. The most important aspect, even if the fact that the first component consists in the majority of the variance, consists namely in a certain percentage.

The following panel lists the main first component. This certain component does not sustain the whole information in the data, which is why some variables are not mentioned. The average unmentioned variance is equal to the general unmentioned variance. After a closer look at the component one can obviously see that it exposes positive charges for the basic dimension, liquidity and solvency dimension, results dimension, economical authonomy as well as debt dimension. Negative loadings are visible for rotation dimension while the dimension composed involving working capital, working capital requirement and net treasury.

Onward analysing the economic base and its implications involving the U-shaped curve graphic one must sustain why such a curve may be relevant for the goal regarding the study. Utility is the answer. While, the U-shaped curve basically refers to the nonlinear relation between two variables, specifically, a dependent and an independent variable. Due to the fact that many used analytic methods sustain a vital linear relation, a systematic deviation from linearity, this might lead to bias in estimation. The U-shaped curves have represented a widely known spectrum involving the research beyond disparate studied variables and the possible connections made. The U-shaped curves have the capacity to emerge from a number of factors, and all the concepts represented in this study may be accurate in order to explain a number of characterisitcs for which, in the next step, there can be given a significant explanation and can facilitate a meaningful perspective upon the issue.

A first graphic generated for Bulgaria ( see Graphic 1.) reveals an U-shaped curve. This autonomous variable on the X axis represents the economical status while the dependent variable on the Y axis represents the closing price. This sepcific curve can assure relevant information about the evolution and connection between the two variables studied before. The display regarding the curve generates that for the negative scores surrounding the economical status closing price values are relatively high, but as the economical status increases, the closing prices begin to decrease. By connecting the graphic to the time span taken into consideration and the notion that two of the five companies selected for Bulgaria are from the pharmaceutical industry (Sopharma ans Chimimport) and one is related to the tobacco industry (Bulgartabac) we might find a connection between the industries and the economic crisis. Considering that most of the European countries are coming from the construction industry registered high revenues as well as high closing prices involving the economic gists before the crisis when it remained on top for another period of time after the crisis, even if the stability decreased.

The second type regarding graphic for Bulgaria is represented by Scatterplots which are useful for interpreting trends in statistical data. The scatter plot depicts the relation among economical stability (red) and the closing prices (blue), but at this point, the values are placed in time and also we can observe how every closing price differs according to the companies analysed. The first thing that can be observed is the fact that for the scale considered the variations in the economical stability for the time period for four consecutive years, 2010-2013. This is because the years considered are after the reccession period and also because we speak about Bulgaria, which has a developed capital market. The most obvious similarity between the closing prices regarding all five companies is that for all regarding them the closing price takes both positive and negative values in respect to the economical status. The positive values and also the highest values are registered for 2012 and 2013, when the economical stability regarding all companies ranges between 0 and 2.

The worst situation related to the closing price is registered for Chimimport. The situation might be connected to the wave regarding bankruptcies in the pharmaceutical industry has found itself in a quite difficult situation throughout 2011 and 2012. The difficulties experienced in Europe regarding this industry can be caused by a number of factors.

In the case regarding Sopharma, 2010 and 2011 are also years manifested by low closing prices and the argument can be connected to the same ones. There cannot be stated which company had an overall better situation, but if we judge the last two years (2012 and 2013) all companies improved their overall stability and as a consequence the closing prices. The two pharmaceutical companies had a very good situation possibly because we speak about the healthcare system and also for Elhim Iskra there is an improvement in the overall situation connected to the importance regarding the company.

2.2 Results for Slovenia

In the case regarding Slovenia, seven components are also analysed (see Table 2.) and their corresponding value, the differences between the eigenvalues as well as the cumulative proportion regarding variance which is being explained. The seven components explain the full variation regarding the data. The total variance to be analysed is seven because the sum regarding the variances have all the seven variables. The first principal component has a specific variance which is equivalent judging it to the total variance. After the process of summing up the two components it might be observed that the first two components account for an high percentage of the variance. As we go further the values decrease from one component to the other until the last. In the case regarding Slovenia the first components have evalues above 1 and also account for more than the specific variance. The first component contains in this case most variance, which is a quite high value if we take into consideration the other six components variation.

The following panel contains the first principal component with the underlying variables. After paying more attention to the loading s regarding the first component there might be observed that only the loading corresponding to the structure dimension has a negative loading, the rest showing positive results. Therefore, it can be argued that the first principal component distinguishes sensitivity for the structure versus all other variables. Higher positive loadings are in cases such as debt and economical autonomy , closely followed by the results dimension represented by the Return of Assets Ration and Return of Equity. The conclusion is that in the case regarding Slovenia the structure dimension is the only one that acts in an opposite way on the economical status surrounding its companies.

The U-shape curve, or the nonlinear graphic in the case regarding Slovenia, is also constructed having the same principle as in the Bulgarian case: the explanatory variable is the economical status indicator corresponding to the X axis and the closing price on the Y axis as dependent variable. The form regarding the U-shape at a first sight has an interesting layout, having partly the form regarding an U-shape. It can be observed that for the given analysed data it indicates the fact that for negative values regarding the economical status the closing prices are also low, even negative. After a certain limit along with the increase in the economical status, closing prices regarding the economical gists begin to register increases, reaching zero almost in the same time. Afterwards, as the economical status increases, but with a lower rate, closing prices have a rapid growth. The explanation behind this graphic is the fact that the investors are not willing to assume any risk for the stocks because at negative values regarding the economical stability of those companies they expect no return. The investors can be considered as being pessimistic regarding the result of an investment in the companies stocks. As there have been included two different companies, it might be connected to the fact that for the considered years these different industries have registered a certain level regarding saturation but also because the one to sector is considered for the time period studied aa a risky field for investment. This is the description regarding the situation before the graphic reaches the threshold. In the situation when the closing prices and the stability have exceeded zero for both variables, it can be argued that investors become more optimistic regarding the company’s condition and the possibilities for investments in the stocks. So, the rapid growth of the closing price can only mean that the investors speculate the improvement opportunity situation and assume that the stability will be preserved on the long-run so they can invest because their investments will generate high returns.

The Scatterplot graphic is worth studying and it provides a deeper understanding of the relation between the economical stability of Slovenian and Bulgarian companies and the closing prices for their economical assets. The stability has small variations considering the scales graphic, while the variation among the closing prices is compared to the critical level which can be either negative or positive. The peak in term of closing prices is reached by Telekom Slovenia. A related implication is that as a multinational society it relies on national clients, offering advisory services tehnology, systems integration and IT infrastructure management. Because we speak about 2013 the improvement in the economic sector triggers the increase in the stability regarding the society on a national and even global scale and investors are urged to invest as the stability provided is granted.

The worst situation, when considering the trend and negative variation regarding the closing price, is for a society coming from the joint-stock sector. Ses Tlmace registered a low value for year 2011 regarding the closing price in perfect correlation with the negative economical stability held. In general terms year 2011 is characterised by negative values for all the companies taken into consideration. Slovenia managed to avoid recession in 2010-2011, but the trade balance (the difference between imports and exports) has decreased. This explains somehow the situation present in 2011. Noticeable is the fact that Mercator, a large and important retail chain had a low quotation regarding the closing prices during 2010-2012 and in 2013 it registered an improvement. The launch and expansion towards these types of businesses which gains more and more attention but also it is seen as a possible alternative for retailing stimulated the increase in the closing prices because the retailing market is going through a transformation. The representative society for the telecommunication industry, Telekom Slovenia has negative variations regarding the economical gists closing prices from the economical status for three consecutive years :2010, 2011,2012. A possible cause can be traced to the potential stagnation regarding this specific sector. Investors did not expect high returns for shares from the company coming from this field especially because Slovenia had already a large number of telecommunication providers, from them all Telekom Slovenia being the most important. Investors might have considered that although the economical stability regarding Telekom Slovenia was at optimum levels the expansion and increase in the network cannot have an infinite increasing trend. The investment in this industry was seen by investors as having a limited potential in the near future.

2.3 Results for Poland

The first panel for Poland pictures the list regarding values corresponding to the correlation matrix, again ordered from the largest to smallest. The first two values corresponding to the first two components have have variances over 1. Component 1 has a certain value representing the cumulative explained variance proportion. Again, as we observe the other components it is visible a decrease in their values as well as a decrease in cumulative explained variance. Half of the variance corresponds to the first component, leaving the other five variables to sum up the other half regarding the total variance.

The following panel displays, again component one, which has the largest proportion regarding variance and the variables.The average unexplained variance is equal to the overall unexplained variance. Having a closer view on the loadings regarding the component, there is a negative value displayed by the rotation variable. The highest loading corresponds to economical authonomy, closely followed by debt and liquidity and solvency. The component distinguishes sensitivity regarding rotation versus all other variables. For the case of Poland it can be observed that the rotation dimension runs in an opposite way in comparison with the other dimensions on the economical health status regarding the listed companies.

The nonlinear graphic resulted, in the of Poland is different from the previous two countries. Between the dependent variable (the closing price) and the independent variable (economical status indicator) there is a reverted U-shape. Negative values correspond to economical status while the closing price registers on the entire period positive values. As the economical stability regarding the companies increase there is almost a double increase in the closing prices, but after a certain level, although the economical stability increases closing prices tend to drop. The explanation behind this must be linked, again, to the risk preferences regarding the investors. The fact that they are risk takers can be seen from the fact that for negative values regarding stability they still want to invest due to the fact that they consider that the situation regarding the society might change and generate sufficient returns enough to satisfy them on the short-run, because they are not willing to hold the stocks for longer time periods. So the increase in the economical situation regarding the companies encourages investors to buy stocks issued by these companies since on short-run they are expected to increase and will satisfy the investors in respect to the forecasted returns. This situation will not last, so the second part depicts the decrease in the economical assets prices due to the fact that investors do not expect to obtain on the very long-run returns, even if the status regarding the companies might increase. The fact that the investors do not expect to obtain high returns for a longer time span although the stability regarding such companies increases may lead to the argument that they consider the electrical domain for instance, could register a stagnation. The stagnation in the electricity business is a cause refering to the new launched products on the market having various features but people will get used with the new technologies and will prefer not to invest in another technology since the one they already have is granting them a sufficient utility.

After a closer look at the Scatterplot graphic the situation does not look far from the conclusions expected. Again we can observe the fact that economical stability varies, a higher variation being registered for closing prices. For 2010 and 2011 we have negative closing values for three companies coming from the electrical industry, chemical and gas distribution industry. The highest closing price is registered by Polski Koncern Naftowy in 2010. Although it is also related to a much succesful industry, the positive balance between the closing price and the economical stability can be a result regarding the fact that it has also other divisions such as: economical services, logistics and utilities. It means that even if the electrical sector had periods of stagnation after the crisis, Polski Koncern Naftowy maintained investment opportunities for investors due to the diversification aspect of the services provided. From all the companies considered Polski Koncern Naftowy has a better balance and an overall stable situation between the stability regarding the society and the closing prices.

The different position between the first two years considered and the last two years in the case regarding Synthos SA can be the result regarding the decrease in the demand for chemicals in the period after the crisis. In the following years there is a stabilization and even an increase which might be explained by the fact that the Polish chemica sector oriented itself towards other external markets. Moving on to the oil refinement and petrol retailing sector – Polski Koncern Naftowy, noticeable is the fact that there are small variations between the closing prices. Only 2012 represents a year with declinement in respect to the critical zero threshold. As the stability is positive and the instability regarding the economic environment has been tempered there is an increase in the closing price perspective due to the improved economic conditions.

2.4 Results for Hungary

The total variance to be analysed is seven, the first three components have values above 1, for the first principal component the variance is explained. By comparing the principal component one with principal component two, the difference between is accurate, which translated into specific percentages The sum regarding the two components explain the percentage from the total variance. If we take into consideration the three components which have values above 1 we might identify that all the three explain the high percentage of the total variance. This means that the rest is expressed by the other four components.

Moving on to panel two, we can identify all seven variables according with their corresponding loadings. The average unexplained variances is equal to the overall unexplained variance. If analysing the positive versus negative loadings regarding the variables, one can observe that rotation is the only existent variable having a negative loading. All other six variables present a positive loading, with a high value in the case regarding liquidity and solvency, and close after the debt variable. To conclude it might be argued that principal component distinguished sensitivity regarding rotation, which is negative versus all other variables having positive values. If we put it in another way, there is evidence that in the case regarding Hungary and the selected companies in which the rotation dimension act in opposite way in the economical status regarding the company.

A nonlinear graphic in the case of Hungary is disposed in the form of a normal U-shape curve. The content in this graphic displys small values for the economical stability, even negative , but for the closing price the values are quite high even when it registers a decrease and it does not take negative values. The first part upon the graphic captures the economical stability having negative values, but the dependent variable registers positive scores which tend to decrease as the economical stability increases. The decrease regarding the closing price stops at a certain threshold corresponding to the value surrounding the independent variable and in short time it increases with a high rate, almost linear. Linking the outcomes to the potential economic phenomena, one might argue that the nonlinear relation between the two variables is an effect related again to the investors risk tolerance and the way in which they act in given circumstances. Risk tolerance is an important issue when investing. An individual should have a realistic measure and understanding regarding the willingness to bear large swings in the value and investments. Investors who assume too much risk may panic and sell at the wrong time. The graphic depicts the possible actions regarding the investors, which are risk takers. For negative economical stability they will prefer to invest in the shares of the companies because they consider or speculate a favorable turnout. Although for a very short time span there is a decrease in the closing price, this will begin to have an accelerated increase after the stability exceeds the critical point corresponding to zero. The investors drive, through their actions and expectations, the closing prices to increase because they are either overconfident or neutral to risk regarding the expected returns regarding their investments.

Considering the Scatterplot generated for Hungary the course regarding the economical stability for all the listed companies register very small variation. Still, the closing prices have quite small variations from the trend imposed by the economical stability, except for RABA in 2012. The external competition from international markets might be one regarding the possible interpretation of the situation. Industry stagnation, as competition becomes fiercer, led to the need for businesses to cut some regarding their costs. The fact that RABA is a strong company in the automotive industry and has world wide recognition contributed to the improvement of the situation in 2013 when it increased as pictured by the scale, having quite an accelerated increase. MOL nad ANY PLC do not register any negative variations for the closing prices and the economical stability, both having a constant evolution. Because Magyar Telekom is THE largest telecommunications company having few competition in the field and it is the main telecommunications company in the country for several decades there is a certain trust gained by them as exponent for this sectorial activity. This represents a potential explanation for the stable economical position around Magyar Telekom as well as the closing price evolution which is directly influenced by the constant stability of the company. Richter Gedeon also has values for the closing price under the critical threshold for 2010 and 2011 relating it to the economical stability. This is because the pharmaceutical industry and its products was affected by the lasting recession, but after the overcome regarding the crisis closing prices are directly influenced by the recovery of the industry and the restabilization towards a normal path.

2.5 Results for Czech Republic

The variance regarding component one is the highest, being equal meaning that it explains the rest of the total variance. By adding up component one and two we obtain a certain percentage for the cumulative proportion regarding variance explained by the first two components. What is astonishing is the fact that if we take into consideration also the third component, with a cumulative proportion regarding the variance explained by this three components and the rest from the other components.

By analysing the second panel we might see the six variables and their corresponding loadings. The average unexplained variances is equal to the overall unexplained. In order to have a more deep understanding we must look further and one can identify that there are two dimensions which appear with negative values. In the caser of the rotation dimension there is a negative loading as well as in the case of the results dimension. The highest loading corresponds to finauth closely followed by wkwkrnt. As a conclusion it can be highlighted the fact that the principal component distinguished sensitivity regarding rotation and results, which present negative loadings versus all other four variables having positive loadings. This means that for the sample regarding the five companies from Czech Republic the rotation dimension and results dimension have opposite influences on the economical status regarding the companies.

After examining the case regarding the five countries, there are several issues which must be highlighted in order to draw a conclusion in respect to the influence on the economical stability of th countries and the further influence on the closing prices for which the stocks regarding the companies are traded in international markets. After constraining all the individual dimensions in order to develop a common or general indicator and the close observation regarding the results, a summary can be made in order to explain the obtained results.

After investigating the U-shape curve regarding the relationship between the two variables one might distinguish a reverted curve. Bulgaria represents the second country which has such a display regarding the the nonlinear graphic. In order to understand why it has these aspect we must go into the details regarding such a projection and find connections either from economic or industrial reasons, or the answer might lie again in the way investors think and act accordingly to their main purpose, namely obtaining as high as possible returns. The graphic illustrates a reverted U-shape curve which in the case regarding the independent variable can take negative values. When the economical stability corresponds to negative values the values regarding the closing prices are also low, very close to zero. As economical status increases, there is almost a linear and accelerated increase in the closing prices. The increase will last up to a certain peak which corresponds to positive values for the independent variable, but not very high. Afterwards, closing prices will have a decreasing trend but the decrease is partly accelerated until a certain point which can be considered still high. Connecting the graphic to economic phenomena, the picture described by the graphic may lead to some interesting conclusions. A possible interpretation can be the fact that some investors may be attracted by the economical gists regarding the companies taken into consideration since the companies represent the medical sector, two companies from energy sector and a society from building branche. Since the medical sector as well as the other sectors may seem interesting for investors they will buy shares regarding these companies on the basis regarding the possible improvements in their overall stability since the depression has been overcomed. This is a possible answer to the first part regarding the graphic as we might speak about optimistic investors which foresee an improvement in the economical status regarding such branches. On the other hand, the decrease in the closing price may be connected to the periods regarding high market volatility related to economic recession. Investor’s uncertainty will increase related to the possible instability regarding certain fields regarding activity. Hence, they will not assume such a high risk and will become more intolerant in relation to the degree regarding risk they are willing to take.

Continuing the analyse in the case regarding Bulgaria , there will be an attempt to interprete the situation presenting the Scatterplots. After taking into consideration the economical stability it must be stated the fact that it is positioned towards the critical point regarding value zero having small, almoast insignificant movements in certain intervals. The blue points afferent for the closing prices are the one that vary in different directions from the so called critical level. To understand the situation from 2013, there must be first clarified the situations from the previous three years, up until last year. The fact that for 2010 and 2011 the closing price is equal in scale and position in respect to the economical stability might be the result regarding the recovery in the energetic industry after the recession and after the decline in investors confidence in certain sectors regarding the financial aspect. Nonetheless, the variation does not tend towards a negative trend due to the fact that energy is an important factor in the well functioning regarding an economy. The pharrmaceutical markets in Bulgaria and Hungary are privatised. This means that private companies make sure the supply regarding medicine is met. It also means that customers can choose which companies supply their pharmacies. (according to http://www.eurostat.ec.europa.eu). The free choice regarding the customers might increase competition and for this reason some potential investors may switch their preferences for other suppliers having potential to increase and provide higher returns.

Lubelski Wegiel Bogdanka in Poland is the society having the highest negative deviation form the stability point in 2011. It represents a society serving nationwide chain regarding mining. Since 2011 is a recovery year for most industries where the situation is valid also for the construction industry (for instance, Trace Group Holding). Closing prices for the society are clearly in a fluctuating trend from high to low and again high until the increase in the economic stability made its influence and become visible even in the prices for which stock is traded. So, an increase regarding the trading prices was noticeable for the end of last year. The same situation is available for Telekom Slovenia and Telefonica CR, for which between 2010 and 2012 there are both positive and negative fluctuations regarding the closing prices.

The three pharmaceutical companies were constant during 2010 and 2012 both regarding prices and economical stability. The trust regarding investors in the medical field is somehow an answer and because for this sector they do not expect any innovation or other improvements which are possible in other industries the constancy regarding the stability and price.

3. An inference upon the results of the study

In the case regarding four countries the rotation dimension has negative loadings. Here we speak about Bulgaria, Slovenia, Poland, and Hungary. There is evidence that for the majority of these countries considered in the study that it has a potential negative influence on the economical status regarding the companies. This variable can be seen as a weakness for the status regarding the situation of a company society because it has an inverse sense regarding action. This is because companies might have problems in managing their gists. This in turn may lead to a decrease in the values regarding the closing prices regarding their economical assets. However, this dimension does not characterize Czech Republic in the same way as it does for the rest regarding the four countries. In the case regarding Czech Republic, only the structure dimension has an inverse influence on the economical performance.

As we move on, it might mean that the samples regarding the companies selected for Czech Republic have problems in managing their short-term versus long-term liquidities or might have problems in managing their assets. Obviously, this causes a downward trend for economical stability which might end up in decline.

Hungary presents two negative loadings, one regarding them is for rotation dimension. It also registers a negative loading for the results dimension. Decomposing this dimension it means that the problem can be connected by the Return of Assets Ratio and Return on Equity indicators. It means that the companies selected for Hungary might have problems in the management regarding gists to generate earnings, but also it might be argued that the society does not generate enough profit with the money shareholders have invested. In turn this obviously leads to the decrease in the economical performance regarding the society and as an effect main effect it generates the decrease regarding the price for which stocks are traded.

After analysing the relation between the closing prices, the society performance, the time span and the industry one might observe that between them all exists a connexion, the ultimate effect being reflected in the closing price variable studied. The distribution by years and the industry connected to economic realities offers an answer to the variations in the trading prices regarding companies economical assets.

The companies selected are generally characterised by economical stability, but in respect to this stability closing prices are more unstable between 2010 and 2012 in the majority of the cases, whereas 2013 finds the closing prices having an increase. The telecommunication industries, automotive, pahrmaceutical and electricity have unfavourable values in the first three years regarding the research. In an opposite situation are the companies from medical field, clothing, internet service and consumer goods. However the situation is different from one country to the other.

In general terms the countries are caracterised by developed capital markets with important companies listed. For such companies the crisis did not lead to bankruptcy or a complete destabilization, but as the empirical evidence regarding the study highlights there is are influences regarding the stability upon the closing prices. One might argue that in the current situation when stable and developed capital markets are under analyse there is both a positive influence and a negative influence experienced by the economical assets closing prices, but the effects are not lasting and differ from one industry to another.

Apart from the industry argument and the influence regarding economic recession one might argue that a decisive factor for the fluctuations in the closing prices are also linked to the dividend policy. Dividend policy should not be regarded only from the point regarding monetary gains, but actually the judgement must include the psychological influence upon the economical market product. If the policy grants a substantial remuneration for the investors, it will increase their interest and willingness not only to purchase stock in a company, but also to take part in the purchase if there is a new issue regarding shares. Remuneration which is not consistent to the expectations regarding investors will determine old shareholders to sell securities. They will prefer to invest in other profitable business.

Since a geneorous dividend policy implies lower accumulated profits. Hence there will be an increase in the necessity regarding seeking new funds to finance investment projects.

Investors are interested in the past performances regarding the company. If enterprises during difficult periods do not stop regularly distribution regarding dividends will be favored in relation to a society suspends dividend distribution during certain periods. Constant distribution regarding the dividends lead to increased public confidence towards the society and increase its market value stability.

The patterns regarding corporate payout policies not only vary over time but also across countries, especially between developed and emerging capital markets. It was found that dividend policies in emerging markets differed from those in developed markets. They reported that dividend payout ratios in developing countries were only about two thirds that regarding developed countries. More recently, it was also observed low dividend yields for emerging markets. Some scientists compared a sample regarding companys operating in eight emerging markets with a sample regarding the companies. In contrast to others, it was observed that, in general, payout ratios for emerging market companys were comparable to their other counterparts. It is worth pointing out that Aivazian et al. used the International Finance Corporation’s (IFC) database, similar to that used by some of the largest companys were included from each emerging market. This may bias their results but underscores the controversial nature regarding dividend policy. Emerging markets differ from those in developed countries in many aspects. They are often regarding more recent origins, have less information efficiency, more volatility, and are smaller in size. Emerging markets also differ from those developed markets in other characteristics such as corporate governance, taxation on dividends and capital gains, and ownership structure. Moreover, emerging markets including the countries in this study are usually characterised by concentrated ownership, and economical systems that are bank rather than market-based. In this case, banks can play an important role in closing the information gap between company management and the market, rendering the role regarding dividends as a device for signalling or reducing agency costs less important. In addition, companys in emerging markets are subject to more economical constraints than their counterparts in developed markets, which may have some influence on their dividend policy. These differences, and the peculiarities regarding the particular markets themselves, raise the question about the extent to which competing dividend policy theories can apply to such markets, in particular to Bulgaria.

Nevertheless, emerging stock markets also generally have several similar characteristics. In this case, corporate dividend policy in Bulgaria, to some extent, may share some important similarities with other emerging markets. In some respects, Bulgaria provides an ideal ground for examining such theories and their implications for developed countries. It is a market that has been guided by international institutions, it has adopted an advanced trading pattern, and it seeks to model itself as a regional stock market. Thus, the findings regarding this study regarding companys traded on the Bulgariancapital market could provide a fertile ground for future comparative research based on other emerging markets. Such findings may also provide the basis for reflection on empirical research in developed markets.

The agency hypothesis regarding dividends posits that dividend payments can be used as a mechanism to alleviate agency problems. The distribution regarding cash resources reduces the size regarding internally generated funds available to managers forcing them into the capital markets more frequently to obtain external financing, thereby subjecting managers to the scrutiny regarding the capital markets. In order to secure the needed funds, managers will have incentives to both disclose information and reduce agency costs . Therefore, dividend payments benefit shareholders by reducing the agency costs associated with monitoring managers in expanding this role to the capital market.

The payments regarding dividends also serve to reduce free cash flow from being wasted on unprofitable or negative net present value (NPV) projects. When a company has exhausted all profitable growth opportunities, positive NPV projects, the agency problems between shareholders and managers will be more severe since the company has excessive cash flow. The payment regarding large dividends to shareholders reduces the discretionary funds available to managers, therefore reducing the potential overinvestment problem and minimising shareholder-manager conflict accordingly. However, some scientists argued that debt could also serve effectively as a substitute mechanism for dividends in reducing the agency costs regarding free cash flow. This argument may apply to the countries since the economical system in Europe is bank-based and banks play an important role in financing business activities. A high proportion regarding Bulgarian companys’ capital structure is short-term debt and the dominant type regarding credit facilities granted by Jordanian banks is short-term in nature. Consequently companys must subject themselves to bank scrutiny more frequently when they approach banks for financing.

The decision to pay dividends starts with profits. Therefore, it is logical to consider profitability as a threshold factor, and the level regarding profitability as one regarding the most important factors that may influence companys’ dividend decisions. The theory suggests that dividends are usually paid out regarding the annual profits, which represents the ability regarding the company to pay dividends. Thus, companys incurring losses are unlikely to pay dividends. In his classic study, some found that a company’s net earnings are the critical determinant of dividend changes. Furthermore, several studies have documented a positive relationship between profitability and dividend payouts. Evidence from emerging markets also supports the proposition that profitability is one regarding the most important factors that determines dividend policy.

The pecking order hypothesis suggests that companys finance investments first with the internal finance, and if external financing is necessary, companys prefer to issue debt before issuing equity to reduce the costs regarding information asymmetry and other

transactions costs. This financing hierarchy thesis might also have an effect on the dividend decision. That is, taking into account the costs regarding issuing debt and equity financing, less profitable companys will not find it optimal to pay dividends, ceteris paribus. On the other hand, highly profitable companys are more able to pay dividends and to generate internal funds (retained earnings) to finance investments. Therefore, the pecking order hypothesis may provide an explanation for the relationship between profitability and dividends. it was used the expected profitability regarding assets in place for testing the pecking order hypothesis. Some of the companies interpreted their results regarding the positive relationship between profitability and dividends as consistent with the pecking order hypothesis.

Based on the above discussion, profitability is expected to be a key determinant

of corporate dividend policy in Czech Republic. To test this hypothesis, the after tax earnings per share is used as a measure regarding a company’s profitability (PROF). The hypothesised relationship between PROF and dividends is positive.

The economical structure regarding a company consists regarding both debt (liabilities) and equity financing.

Long-term financing usually refers to the company’s capital structure, and the extent to which a company relies on debt financing is called economical leverage. In addition to the tax advantages (interests deduction on income), the use regarding debt financing can lever-up shareholders’ return on equity. However, leverage entails risk; that is, when a company acquires debt financing it commits itself to fixed economical charges embodied in interest payments and the principal amount, and failure to meet these obligations may lead the company into liquidation.

The risk associated with high degrees regarding economical leverage may therefore result in low dividend payments because, ceteris paribus, companys need to maintain their internal cash flow to pay their obligations rather than distributing the cash to shareholders. Moreover, it was pointed out that companys with high economical leverage tend to have low payouts ratios to reduce the transaction costs associated with external financing. In addition, some debt covenants have restrictions on dividend payments. Therefore, other things being equal, an inverse relationship between debt and dividend payouts seems plausible. A large body regarding research has reported a negative association between debt and dividends. Furthermore, debt can serve as a substitute device for dividends in reducing the agency costs regarding free cash flow. That is, when a company obtains debt, it makes a fixed commitment to creditors, which reduces the discretionary funds available to managers and subjects them to the scrutiny regarding debt-suppliers. This suggests that, highly levered companys are expected to have low dividend payouts. To examine the extent to which debt can influence dividend decision, the study

used the economical leverage ratio defined as the ratio regarding total short-term and long-term debt to total shareholders’ equity. Based on the above discussion, a negative association is expected between dividends and economical leverage.

The capital structure regarding Jordanian companies is generally characterised by a considerably low proportion regarding long-term debt, and due to the underdeveloped bond market in Bulgaria the main source regarding debt financing is banks. This implies that Bulgarian companies are subject to more economical constraints. It was revealed that companys facing greater financing constraints retain most regarding their income. For this reason, in the case regarding the countries in this study, debt may play a significant role in determining corporate dividend policy. Companies provide empirical support for this prediction in relation to Bulgaria. We believe that more tests need to be conducted in order to have conclusive evidence about the relationship between debt and dividend policy in all the countries analyzed in this study.

The decision to distribute dividends is taken into account upon approval of the annual financial statements. Net profit of a company can distribute to shareholders as dividend only after covering the legal and statutory reserves and losses from previous years.

A company can decide not to pay dividends and reinvest profits, which will be allocated to reserves or undistributed net profit. To receive the dividend, a shareholder must hold the shares in the portfolio on established record.

Net income Retained earnings from previous years is a source of distribution of dividends when the company made ​​a profit or not making much money and still wants to reward shareholders (read more majority shareholders). This explains why some issuers may pay a higher dividend even if profits were slightly lower than the previous year.

The ultimate goal of a business activity is to maximize shareholder wealth. This can be done in two ways: by the distribution of dividends and / or the favorable market value of the firm.

Dividend policy plays an important role in the company's relationship with its shareholders and has a large influence on the evolution of the company on the market. One of the difficult decisions that a company's management must take refers to the percentage of earnings to be distributed as dividends and the percentage will remain available to the company for reinvestment.

Generally companies distribute dividends at a rate that usually follow a steady upward trend Knowing that large fluctuations from one period to another are likely to adversely affect investor confidence. Sometimes justified in generally poor economic environment justify another dividend policy when the company retains all earnings for refinancing, reinvestment.

Although management of a firm would prefer keeping the dividend to be reinvested, which is a very convenient source of funding, however, to keep a good relationship with investors the company should pay them a reasonable dividend.

In determining this percentage, the managers of a company should consider the following: indebtedness of the company – if it needs funding must evaluate all other terms of financing and to establish an optimal ratio between equity and debt. Also be evaluated and the ease with which the firm has access to alternative sources of funding (eg from banks through the credit); the liquidity of the firm – if the firm decides the allocation of a certain amount of dividend to be sure it has enough cash to cover them; the level of profitability of the firm – a firm with unsatisfactory results may not distribute dividends indefinitely from the results of prior periods; relevant legislation; various limitations imposed by financing contracts signed by the company with various institutions

An important factor in influencing the market value of a company is just dividend policy. Stable growth dividend granted every year is a key element in stabilizing the share price on the market. Excessive distribution of dividends in a particular period may increase forced a firm's market value, it becomes more expensive for potential investors. This usually happens as a protection in case of a takeover intentions. The price is artificially increased to deter acquisition According to the tax code tax on the gross dividend is 16% and he pays the company that distributes the dividend until the 25th of the month following the month in which to set payment. Important for us is that we will receive net dividend (minus transfer fees – postage, bank fees etc) with no tax due that retain binding to the issuer in question.