DETERMINANTS OF MARKET PRICES OF SHARES ON THE CAPITAL MARKET OF BOSNIA AND HERZEGOVINA

Tržišta akcija su efikasna ako cene u bilo kojem momentu reflektuju sve javno dostupne informacije. Cene akcija bi trebalo da se prilagode u momentima kada investitori pokušavaju da iskoriste nove informacije koje nisu bile predmetom računovodstvenog evidentiranja. Osnovni cilj ovog rada je da se utvrdi da li zaista finansijski izveštaji odabrane skupine preduzeća koja kotiraju na Sarajevskoj i Banjalučkoj berzi predstavljaju dobru baznu osnovu i odraz tržišnih cena ili naprosto služe kao zakonska obaveza i zahtev regulatornih agencija. U radu će biti sprovedena regresiona analiza zavisne i nezavisnih varijabli za period od 2011. do 2015. godine. Kao zavisna varijabla će biti tretirana zatvarajuća cena trgovanja na berzama, dok će se kao nezavisne varijable koristiti sledeće: odnos tržišne cene i zarade (PE racio), zarada po akciji (EPS), neto dobit nakon oporezivanja (ND), ostvareni profit na akcijski kapital (ROE), odnos tržišne i knjigovodstvene vrednosti (PB), i ukupan promet na berzama (PR).


Introduction
Unlike monetary economists, financial economists have developed a theory of expectations in the financial markets.The theory led them to the same conclusions as the theory of rational expectations, i.e. the following conclusions: the expectations on financial markets are the same as optimal forecasts using all available information.Since financial economists have given their theory a different name, that is, they called it a hypothesis on market efficiency, it can be said that it is the application of rational expectations in determining the prices of stocks and other securities.The market efficiency hypothesis is based on the assumption that the prices of securities in the financial markets fully reflect all available information.
There is a certain causality between the state of the economy and market price movements, in the sense that when economic and market conditions are favorable, one can expect a rise in the stock prices and vice versa.It is important to note that the market price movement of shares has a significant influence not only on the state of the economy but also on the performance of the observed company that the company realized in the observed period.According to the classic theory, the movements of stock prices are dominantly influenced by the company's profits, and the classic theoreticians believe that the value of shares represents the present value of future dividends and that the payment of dividends depends in the first place on the earnings of enterprises, which means that the earnings indirectly affect the prices of shares.Unlike the classic theoreticians, the behaviorists believe the behavior of investors to be significant for stock prices, i.e. the degree of investors' confidence in the movement of stock prices and the mere operations of the company.
According to the FTSE Global Equity Index Series, the capital market in Bosnia and Herzegovina is not classified and belongs to the group of frontier markets.Frontier markets are primarily the markets of developing countries that are characterized by low market capitalization and poor liquidity.The positive side of these markets is that they are open and accessible to foreign investors, but on the other hand, there is a greater danger of economic and political instability and poor correlation with the more developed capital markets.
Long-term prospects of companies as well as the state of their assets in the stock markets in the region have almost no impact on the decisions of potential buyers in terms of the price they are willing to pay, which is not the case on the developed capital markets.Of capital importance for the entry of domestic and foreign investors is the assessment of political risk and certain macroeconomic indicators for a long period.
The business world is not immune to the presentation of false information regarding financial statements, the so-called creative reporting.Such reports are designed to mislead or misrepresent the status and outcome of an endpoint with a view to achieving a goal at the expense of the balancing principle and accounting standards.Many potential and actual investors base their investment decisions on the market prices of listed companies on stock exchanges.According to Professor Asvat Damodaran, the process of analyzing financial reports and organizational diagnostics brings with it some potential problems, especially in the data collection phase, where it is of great importance the ability to assess the reliability of financial statements.Professor Damodaran refers to this side of analysis as: "the dark side of determining values".Therefore, the analysts employed in the planning and analyses department of companies perform various research and assessments based on the available data and information.It often happens that the inputs are serious mistakes, especially in the countries of the Western Balkans, which leads to the wrong decisions of the management.It is very important to have a certain amount of reserve when it comes to the managers' forecasts, because sometimes they look at things too optimistically.
This research is structured in four parts.The first part refers to the introductory considerations and a review of the relevant literature.The second part deals with the analysis of stock exchange indices and volatility of the markets of some developed countries, EU member states and Western Balkan countries.The third part focuses on

Review of Relevant Literature
Testing a weak form of market efficiency is focused on checking the selected sample of shares in terms of the movement of their prices.Therefore, if the future changes in securities prices are similar to the changes in securities prices occurring in the past, then the historical price movement can be used as an approximation for abnormal earnings.A lot of studies have shown that the changes in historical prices over time are independent.Even when some dependencies are detected, the transaction costs work in the direction of equalizing the surplus profit.Also, there is some evidence that the shares perform better over certain periods of time during the year.For example, in the period from December to January, there is a regular shift in stock prices.This phenomenon is called the January effect.It implies that the prices of shares rise on Fridays and before the holidays, and fall on Mondays.This phenomenon is in contradiction with the theory of market efficiency.
Based on the quarterly data for the period between 1971 and 1998, Baks and Kramer (1999) reached the three main conclusions regarding the relationship between the liquidity growth rate and returns on shares.Their first conclusion based on empirical research was that higher liquidity growth rates lead to higher rates of return.The second conclusion they reached is that the growth of liquidity rate entails a decrease in real interest rates.Their third conclusion was that the liquidity spillover effect is valid, that is, that the increased liquidity rate in one country is a reflection of the first two results or conclusions.
On a panel of 33 countries covering Europe, Asia, Australia, the United States and Africa for the period from 1978 to 1999, it was concluded that market capitalization, the total value of trade in relation to GDP and total turnover could affect the development of financial intermediation and openness.The last two measures are complementary to each another, the first one referring to the size of the economic activity and the second one to the size of the market.The methodology included a stochastic model, and time variations in size and trading (Kai Li, 2007).Belke et al. (2008) used an analysis based on the VAR assessment methodology at the global level.The analysis used a group of aggregated data across a wide range of countries, which together accounted for around 72.2% of the global GDP.In the context of impulsive reactions based on quarterly observations since 1984, until 2006, they concluded that positive shocks lead to an increase in global real estate prices, but not to higher stock prices.The same results were confirmed by Belka and Rees (2009), who analyzed the global shocks or their impact on national variables.Also, their results have shown that global liquidity shocks have no positive effects on global stock prices.
The turnover does not reflect the liquidity of the market, but simply the interaction with the size of the market.According to Choong et al. (2010), the value of trading is considered a better indicator of growth of market shares prices than the market capitalization ratio.Also, the traded shares may depend on the level of market capitalization, since larger markets may have a smaller trade volume.Therefore, the relationship between market capitalization and turnover provides the information on stock market conditions and returns.Vo and Batten (2011) concluded that the size of the Vietnamese stock market does not have a significant impact in the context of the formation of stock prices.In the larger part of their regression analysis, they tried to determine the relationship between market liquidity (measured by turnover) and return on shares.

Analysis of the Movements of Stock Exchange Indices of Some Developing Countries with a Focus on the Countries of the Western Balkans
The National Association of Securities Dealers -NASDAQ and OMX as a Swedish company with the dominant position in the Scandinavian framework are the two most important institutions on the global scale.The OMX offer to take over the London Stock Exchange in 2001 in order to gain greater competitive power failed.NASDAQ attempts to spajanje NASDAQ-a i Interkontinentalne berze (ICE).Tabela u nastavku teksta pokušava da putem analize tržišnih indikatora poslovanja identifikuje šta znači najveća berza, odnosno: Koje su najveće svetske berze?Kao tržišni indikatori mogli bi biti reprezentativni: tržišna vrednost akcija, ukupna vrednost trgovanja, ukupan promet (ukupna vrednost trgovanja/broj akcija), akcijski promet ili jednostavno broj kompanija koje kotiraju na berzama.
Za razliku od svetskog, evropsko tržište deonica koje prati berzanski indeks Euro Stoxx 50 u prvom polugodištu 2016.godine doživelo je pad već dva kvartala kontinuirano kao posledica referendumske odluke građana Velike Britanije.Dakle, vrednost berzanskog indeksa Euro Stoxx 50 je u drugom kvartalu 2016.godine zabeležila relativni pad od oko 4,67%, što je indirektno uticalo na bosanskohercegovačko finansijsko tržište u kontekstu povećanja prinosa javnog duga u odnosu na zonu eura.Grafikon u nastavku teksta prikazuje analizu kretanja berzanskih indeksa razvijenih zemalja sa osvrtom na zemlje u razvoju za period od 2010.do 2015.godine.Tabela 1. Internacionalna komparacija tržišta akcija u kontekstu prometa, tržišne kapitalizacije i broja listiranih kompanija zaključno sa 31.01.2014.godine (u mil.USD) The market value of shares, i.e. market capitalization, is the total number of shares held by shareholders multiplied by the price of shares (which has nothing to do with capital in the balance sheet).On the other hand, stock prices have both upward and downward trends, whereas market capitalization only occurs when the calculation is performed.This is also part of the problem.For example, had the Tokyo market been observed at the end of 1989, before the market crash, the Tokyo stock exchange would have appeared as the world's largest stock market.The table below illustrates the comparative analysis of the world's strongest stock exchanges in terms of turnover, market capitalization and the number of listed companies as of 31.01.2014.
The value of shares traded in the capital market of the London Stock Exchange at the end of January 2014 amounted to about USD 822 billion, with the structural share of foreign shares amounting to around 25%. Also, the share of foreign trade on the New York Stock Exchange -(NYSE) was about 9% and on NASDAQ OMX about 1%.
Izvor: Sarajevska berza vrednosnih papira (SASE), Banjalučka berza hartija od vrednosti (BLSE), Agencija za statistiku BiH From 2010 to 2015 the frontier markets lost about 4.7% of their value according to the stock index movements.Among the 14 observed stock exchanges of both developed and frontier markets, the biggest drop in the value of stock exchange indices was recorded by the Athens stock index with a decrease by around 12.9%.Observed from the other side, the highest average value growth in the observed period was recorded by the Austrian Stock Exchange index -(ATX) by around 17%. Unlike the capital markets of the EU member states, the markets in the region had a negative trend regarding the stock exchange indices, with the stock exchange index of the Republic of Srpska having recorded the average relative drop by about 6.48% in the observed period.Furthermore, the average relative decline of the index of the Federation of B&H was not that much lower, the index SASX-10 having recorded a decline by around 6.18% in the observed period.The Belgrade Stock Exchange Index -BELEX15 in the observed period had a modest average growth by about 0.15%.The chart below shows the analysis of the liquidity of the capital market in B&H in the period: 2006 -2015.
The highest share of turnover in gross domestic product in the observed period was recorded in 2007 (8.95%) and in 2015 of about 6.24%.The average share of turnover in GDP amounted to around 3.78%.In terms of the lowest values of turnover in GDP, it can be noted that the lowest values were achieved in 2009, and 2010, i.e. 1.61% and 1.12% respectively.The main reason for the increase in turnover in the last observed year was primarily the increase in the indebtedness of entity governments based on the issuance of treasury bills and bonds that were purchased by domestic commercial banks and in respect of which there was a reduction in financing by foreign financial institutions.When it comes to investment activities and potential, the capital market in B&H is not able to provide faster development of economic activity, as commercial banks are more focused on government debt due to safe and high interest margins.Volatility is one of the most important categories concerning the stock market which indicates the degree of deviation, i.e. the variations in the observed period.Thus, it is measured by the standard deviation that monitors the individual stocks and funds, and it is announced so that the investors would know how risky the concerned investment is.The table below shows the volatility of the selected group of stocks from the Sarajevo and Banja Luka Stock Exchanges in 2015, movements of turnover, and the prices of shares.Prethodna tabela ilustruje kretanje prometa, volatilnosti tržišta kao standardne devijacije prometa te kretanje tržišnih cena 15 najlikvidnijih akcija na tržištu kapitala Bosne i Hercegovine (tržište kapitala Federacije Bosne i Hercegovine i tržište kapitala Republike Srpske).Ono što se može uočiti je da volatilnost tržišta za veći broj akcija ne odražava direktnu refleksiju u kontekstu povećanja/smanjenja cena trgovanja za odabrani uzorak akcija.Dakle, promet akcijama tj.volatilnost prometa ne utiče u prvom redu na formiranje cena pojedinih akcija, upravo zbog prisutne nelikvidnosti i neučestalosti u sekundarnom trgovanju s jedne strane te sa druge strane uticaja i drugih nefinansijskih faktora na formiranje zaključnih cena.

Metodologija istraživanja
Prema Bryman & Bell (2007) postoje dva oblika istraživačke metodologije, i to: kvantitativna i kvalitativna.Kvantitativna metoda se bazira na prikupljanju i analizi podataka i povlači sa sobom deduktivni pristup gde se akcenat stavlja na teoriju testiranja.Za razliku od kvantitativne metode, kvalitativna metoda uglavnom koristi induktivni pristup.Tabela 2. Analiza odabranog uzorka akcija u pogledu volatilnosti prinosa i promena cena na dan 31.12.2015.godini (u BAM) The previous table illustrates the movements of turnover, volatility of the market as a standard deviation of turnover and the movements of market prices of the 15 most liquid shares in the capital market of Bosnia and Herzegovina (the capital market of the Federation of Bosnia and Herzegovina and the capital market of the Republic of Srpska).What can be observed is that the market volatility for a large number of stocks does not directly reflect the increase/ decrease in trading prices for the selected stocks.Therefore, the turnover of shares, i.e. the volatility of the turnover does not primarily affect the formation of the prices of particular stocks, precisely due to the present insolvency and infrequency in secondary trading on the one hand, and the influence of other nonfinancial factors on the formation of closing prices, on the other hand.
Prethodna regresiona jednačina prilagođena je na sledeći način:  The objective of the market participants is to find out which factors can influence the movements in stock prices to accurately assess the value of the shares and their future trends.Therefore, there are several qualifications of factors that influence the future movements of stock prices, depending on whether a short or long horizon is being considered.The most important internal factors that could affect the future movement of stock prices are as follows: • Profit.The basic equation of the regression model that will be adapted to the given variables can be presented as follows: Y i,t = X i,t β + a i + U i,t (1) for t = 1, ..., T, i i = 1, ..., N Where is: Y i,t -dependent variable for an individual group i in time t X i,t -an independent variable that is time varying; a i -unremarkable time-immutable individual effect; and U i,t -an error in the model.
The previous regression equation is adapted as follows:  It represents the ratio of price and earnings, i.e. it equals the ratio between the market price of one share and earnings per share, and it is the most commonly used indicator of the relationship between the market price of the share and the company's profit.

EPS
Earnings per share represents the profit of a company that is allocated to each owner of ordinary shares.It also serves as an indicator of a company's profitability.NP Net profit after tax.

ROE
It represents the relationship between net profit and realized own capital.

P/B
The ratio of market and book value is obtained by comparing the market value of shares with their book value.It is obtained by dividing the current closing price of shares in the last quarter with the book value per share.

TR
The turnover of a share is a measure of liquidity, which indicates the rate of sale, i.e. conversion of securities into cash.
The table above shows the volatility of the selected indicators in the model concerning the variation of the standard deviation.The strongest intensity of volatility in the observed period was achieved by the following indicators: net profit, followed by turnover (34,024.5%),and market price and earnings ratio (170.25%).The share of turnover in GDP in 2011 was only about 2.56%, and in 2015 there was a sudden increase by around 6.24%.
Therefore, this is not the result of active trading, but simply a reversal from equity to debt securities issued by the Government due to the lack of necessary financial resources to finance the budget.Also, the relationship between the market prices and wages had a volatile trend given that the high values of P/E ratio are not due to the good performance of the company in terms of future expectations as the capital market in B&H is a frontier market, characterized by many days without trading, hence the high values can be understood as some sort of compensation for business risks.Na visoko razvijenim tržištima kapitala tržišna cena je pre svega odraz raspoloživih finansijskih informacija u prvom redu neto dobiti ili pozitivnog novčanog toka, što svakako utiče na formiranje ravnotežne cene i realnog odnosa cene i zarade.Na neefikasnim tržištima kapitala susrećemo visoke i apsurdne vrednosti P/E koeficijenta, gde obično preduzeća sa lošim poslovnim rezultatom imaju visoke vrednosti P/E koeficijenta.Iz prethodne matrice korelacije zabeležena je obrnuta proporcionalnost između zaključne cene odabranog uzorka akcija preduzeća iz sastava berzanskih indeksa Sarajevske berze i Banjalučke berze (SASX-30, BIRS, GIRS, MIRS) i P/E koeficijenta (-0.166).Veći P/E koeficijent nalazi se u granama sa visokom tehnologijom, što direktno ne mora značiti da se radi o kvalitetnim preduzećima.
S obzirom da promet predstavlja meru likvidnosti tržišta, tj.lakoću prodaje i kupovine akcija, u ovom istraživanju je zabeležena pozitivna korelacija između prometa odabranog uzorka akcija i zaključne cene (0.141).Dakle, sa povećanjem trgovanja akcijama preduzeća dolazi do povećane likvidnosti što ohrabruje investitore da je tržište aktivno, te time deluje i na povećanje tržišnih cena.Osim P/E koeficijenta negativna korelacija je zabeležena i između zaključne cene i neto dobitka (-0.23).In highly developed capital markets, the market price is primarily a reflection of available financial information, in the first place of net profit or positive cash flow, which certainly affects the formation of the equilibrium price and the real relationship between price and earnings.In inefficient capital markets, we encounter high and absurd P/E coefficients, when companies with poor business results usually have high P/E coefficient values.The previous correlation matrix suggests the inverse proportionality between the closing price of the selected sample of shares of the companies from the stock exchange indices of the Sarajevo Stock Exchange and Banja Luka Stock Exchange (SASX-30, BIRS, GIRS, MIRS) and the P/E coefficient (-0.166).A higher P/E coefficient is found in branches with high technology, which does not necessarily imply that these are quality companies.Namely, the examination of profitability of a company's business requires a broader analysis, which certainly includes other factors of development possibilities, such as competitive analysis, financial analysis, yield and asset analysis.
The previous table shows that the closing price (CP) has the highest positive value of the coefficient with the indicator of earnings per share (3.81), then with the return on equity (0.18), the relationship between market price and book value (0.058) and turnover (0.0001).In general, the indicator most related to return on equity is the ratio between price and equity.Given that the difference between return on equity and cost of capital is a measure of added returns to capital investors, there is a link between earned additional returns and whether the company's shares are traded at or below the accounting value.In cases where additional returns are negative, the shares are traded below the book value.On the contrary, when the return on equity is expected to be equal to the cost of capital in infinity, the shares are traded at book value.On the other hand, the strongest negative correlation is present between the closing price and the price-earnings ratio (-0.02) and the net profit.The relationship between the net profit and the price of company shares may be aggravating in the context of an explanation.Certainly, without profit, companies cannot survive in the long run.High net profit does not necessarily mean high prices of shares, just like huge losses do not always have to be a factor in low stock prices.This is particularly true for the frontier capital markets, where liquidity is at a very low level.Therefore, it can be said that the price of shares does not play a significant role only in respect of the current salary, but also in respect of its projection, that is, the expectations of future earnings.Furthermore, it is important to note that when assessing the value of the shares, the supply and demand relationships are of great importance, which means that the prices of shares are not determined by mathematical formulas, but that the prices are gravitating around them.Therefore, the price of a share has a growth trend if the demand is higher than the supply, and vice versa.

Conclusion
In this paper we investigated the significance of financial and market indicators, i.e. financial reporting, in the formation of closing prices in stock exchange trading, focusing on whether the potential and actual investors can rely on them when making their business, financial, strategic and other decisions, or whether financial reports only reflect the legal framework and the need to submit the set the financial statements prescribed by the capital market regulator.In the regression analysis, the closing price was taken to be the dependent variable, while the independent variables were as follows: market price and earnings ratio, earnings per share, net profit after taxation, return on equity, the ratio of market and book value, and the total turnover on stock exchanges.The zero hypothesis in the paper was rejected because the F-test analysis did not show that none of the independent variables influence the dependent variable.In terms of correlation, the strongest correlation was present between the closing price and earnings per share, then return on equity, the ratio of market and book value, and the total trading volume on the stock exchanges.On the other hand, the weakest correlation was observed between the ratio of the market price and profit, as well as the net profit of the observed sample of companies.
The results obtained should be taken with a certain reserve margin, because in the underdeveloped and inefficient capital markets such as the capital market in Bosnia and Herzegovina, the absurd values of certain financial coefficients occur due to the infrequent secondary trading in shares.Therefore, the unbalanced supply and demand and the illiquidity of the stock market reflect in the impossibility to form the real price of shares.Consequently, potential and actual investors Za dalji razvoj tržišta kapitala u Bosni i Hercegovini potrebno je usaglasiti neusaglašenu zakonsku regulativu na nivou entiteta, smanjiti fragmentiranost tržišta, pojačati publicitet informacija o svim pravnim subjektima koji se kotiraju na tržištu kapitala, te time pojačati kvalitet i informacionu bazu podataka.Takođe, potrebno je usmeriti snage na integraciju regionalnih berzi u cilju povećanja likvidnosti i prepoznatljivosti uspešnih preduzeća kako domaćim tako i inostranim investitorima.cannot rely on the fact that positive results over the last few years in certain companies are a reflection of an increase in market prices, and vice versa, that the market prices are formed based on the sound financial position and continuous profitability.
To further develop the capital market in Bosnia and Herzegovina it is necessary to harmonize non-compliant legislation at the entity level, reduce market fragmentation, increase the transparency of information on all legal entities listed on the capital market, and thus strengthen the quality and information database.Also, it is necessary to focus on the integration of regional stock exchanges to increase the liquidity and recognizability of successful companies by both domestic and foreign investors.
Determinants of market prices of shares on the capital market of Bosnia and Herzegovina 57 Bankarstvo, 2017, Vol.46, Issue 3

Figure 1 .
Figure 1.Changes in the average values of stock exchange indices of developed and frontier markets in the period 2010 -2015 (In %)
Determinante tržišnih cena akcija na tržištu kapitala Bosne i Hercegovine Bankarstvo, 2017, vol.46, br. 3 • Price-earnings ratio-P/E.• Earnings per share-EPS.• Price-to-book ratio-P/B.• Dividend.Unlike internal factors, external factors that are significant in terms of the future price movements include: • Macroeconomics factors.• The movement of gross domestic product; • Inflation; • Interest rates.Below is a table showing the internal variables that will be impacting the movements of the prices of shares in the capital market of Bosnia and Herzegovina.This research used a series of time data about the stated internal financial indicators of the selected group of shares from the Stock Exchange Index of the Sarajevo Stock Exchange (SASX-30) and the Banja Luka Stock Exchange (BIRS, GIRS, MIRS).The enterprises within the mentioned stock exchange indices are widely dispersed in terms of their branches of activity and the following activities are predominant: manufacturing activity, construction, chemical industry and financial sector.The time series of data refers to the period 2011 -2015.

Table 1 .
International comparison of stock markets in the context of turnover, market capitalization and the number of listed companies as of 31.01.2014(In USD million) Source: Valdez, S., Molyneux, Ph. (2016).An Introduction to Global Financial Markets, 8 th edition, Macmillan Publishers Limited, UK, London, p. 197

Table 2 .
Analysis of the selected sample of shares in terms of yield volatility and price changes of 31.12.2015(in BAM) Source: www.sase.baand www.blberza.com(Calculation made by the author) Alihodžić A. Determinants of market prices of shares on the capital market of Bosnia and Herzegovina

Table 4 .
Abbreviations and description of variables

Table 5 .
Descriptive statistics of the following parameters: CP, PE, EPS, NP, ROE, PB of the selected group of shares on the capital market of B&H in the period: 2011 -2015 Source: Calculation by the author based on the data from Sarajevo and Banja Luka Stock Exchanges (STATA 13.0)

Table 6 .
Pearson coefficient of correlation between dependent and independent variables in the model in the period: 2011-2015 Source: Calculation by the author based on the data from Sarajevo and Banja Luka Stock Exchanges (STATA 13.0)

Table 7 .
Basic regression model between dependent and independent variables of the selected sample of stock exchange indices on the Sarajevo and Banja Luka Stock Exchanges in the period: 2011-2015 Calculation by the author based on the data from Sarajevo and Banja Luka Stock Exchanges (STATA 13.0) Source: