Stock Price Sensitivities to Interest Rates
and Firm Characteristics
Keywords:
Stock prices, interest rates, dividend yield, earning growth, capital size, market risk (beta), financial strength, and stocks valuation.
Stocks in two industries are considered to be interest rates sensitive: financial institutions and utilities. Financial institutions stocks are interest rates sensitive because their earnings are interest rates sensitive. In the case of public utilities, the pricing of the utility is pegged by a regulatory control with a lag. Any higher interest rates (higher costs) would reduce their earnings and thereby the prices of stocks.
On the other hand, there are some industries, whose stocks are considered to be less sensitive to higher interest rates, such as: health-care, pharmaceutical, and consumer-staple. These companies are less sensitive to higher interest rates because the demand for their products is relatively stable during changing economic conditions.
The stock price sensitivity to change in interest rates within any one of these different groups of stocks varies. The objective of this study is to examine the contribution of some of the firms' characteristics to explain the firms' stock prices sensitivity to interest rates. These characteristics include distribution of dividends, dividend yield, earning growth rate, market capital, market risk (Beta), valuation ratios (PE or Price/book), financial strength (Debt/equity), and pay-out ratio.