The Impact of Financial Performance on The Share Price: Evidence from Listed Finance Service Sector Companies in Sri Lanka

Abstract

Introduction: Financial performance is an important factor in attracting investors to buy shares and make investment decisions. This study examines the impact of financial performance on the share prices of the financial service sector in Sri Lanka. Therefore, the main purpose of the study is to explore “Is the relationship between financial performance and share price,” with special reference to the listed financial service sector in Sri Lanka.

Methodology: Return on Assets (ROA), Return on Equity (ROE), Net Profit Margin, Earnings Per Share (EPS), and Debt to Equity Ratio (D/E) were used as the dimensions of financial performance, while closing market price was used as the proxy for the share price. Secondary data was used and obtained from published annual reports in respective companies and the CSE website. A quantitative research design was employed, analyzing panel data from 21 listed companies including finance, banking, and insurance companies over the period of 2015–2023, yielding 189 observations.

Findings: According to the study's findings, two independent variables, such as return on assets and earnings per share, had a statistically significant relationship with the dependent variable of share price, and other independent variables had not statistically significant relationship with the dependent variable. The result highlights that the overall models are statistically significant. The study found out that there is a strong impact of earnings per share (EPS) and return on assets (ROA) on share prices of the financial service sector in Sri Lanka.

Conclusion: The findings of the study have practical implications for investors and stakeholders to make their decisions respectively. Also, this study concludes that the proxy of financial performance can be used for investors to make decisions in respect to investing in shares in the financial service sector in Sri Lanka.